Today's CPA March/April 2015 by The Warren Group

Todayâ&#x20AC;&#x2122;sCPA MARCH/APRIL 2015

TE X AS SOCIETY OF

C E RT I F I E D P U B L I C AC C O U N TA N T S

Time-Driven Activity-Based Costing: A Powerful Cost Model

Designing a Procurement Function An Accounting Soothsayer from the Early 1950s: Could He Accurately Predict the Future of Accounting? Avoiding the Nonprofit Tax Minefield

Also: CPAs at the Capitol and in the Legislature

CONTENTS

CHAIRMAN Mark Lee, CPA

VOLUME 42, NUMBER 5 MARCH/APRIL 2015

EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE

EDITORIAL BOARD CHAIRMAN James Danford, 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 C. William (Bill) Thomas, CPA, Ph.D.

WEB EDITOR Wayne Hardin whardin@tscpa.net

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

cover story 24 Time-Driven Activity-Based Costing: A Powerful Cost Model society features 12 Spotlight on CPAs Accounting Under the Rotunda 16 Capitol Interest CPAs at the Capitol and in the Legislature technical articles 30 Designing a Procurement Function 34 An Accounting Soothsayer from the Early 1950s 40 CPE: Avoiding the Nonprofit Tax Minefield columns 4 Chairman’s and Executive Director’s Message Business and Industry Focus

DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton

6 Tax Topics Employees’ Non-Taxable Fringe Benefits – Seven Mistakes Made Most Often

CLASSIFIED

8 Business Perspectives Earnings Quality

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; Aaron Borden, CPADallas; Jacob Briggs, CPA-Fort Worth; Kristan Allen Crapps, CPA-Houston; James Danford, CPA-Fort Worth; Melissa Frazier, CPA-Houston; Greta Hicks, CPA-Houston; Baria Jaroudi, CPA-Houston; Brian Johnson, CPA-Fort Worth; Tony Katz, CPA-Dallas; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Marshall Pitman, CPA-San Antonio; Kamala Raghavan, CPA-Houston; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPACentral Texas.

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

9 Accounting & Auditing IFRS Adoption in the United States: The Latest Developments 10 Tech Issues Do You Have the Right Accounting Software? 14 Chapters Chapter Presidents in Business and Industry departments 20 Take Note 45 TSCPA CPE Course Calendar 46 Classifieds

© 2015, 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.

CHAIRMAN’S AND EXECUTIVE DIRECTOR’S MESSAGE

Business and Industry Focus

By Mark Lee | 2014-2015 TSCPA Chairman and John Sharbaugh, CAE | TSCPA Executive Director/CEO

PAs who work in business, industry, government and nonprofit organizations have diverse and unique professional demands. Success in these roles depends on staying current and providing strategic value to the organization. TSCPA offers information and resources that business and industry CPAs can use to assist them in their jobs and advance their careers. In this issue of Today’s CPA, we are highlighting key activities and programs in the past year that were focused on this segment of the Society’s membership. TSCPA designated April 2014 as B&I Month. A LinkedIn Connection campaign was created and promoted. Also as part of B&I Month, TSCPA introduced a new series called “A Day in the Life.” CPAs working in a variety of organizations and positions are profiled in the series. The profiles are posted on the B&I LinkedIn page. In addition, a recruitment promotion was launched for B&I members. With this promotion, if members recruited one new CPA member or five student/candidate members by a specific deadline, they were entered in a random prize drawing to receive free TSCPA membership dues for themselves. The theme for B&I Month this April is “Be a Part of Something Bigger Than Yourself.” Activities are planned throughout the month, including a recruitment promotion. Three years ago, the Society launched a blog called Industry Issues. It is written by TSCPA member Bill Schneider, CPA-Dallas, who is the chairman of TSCPA’s Business & Industry Committee. He shares his thoughts on critical issues and opportunities facing the profession. His posts have been viewed by many people all over the world. A new feature was recently introduced – guest bloggers. The chapters are involved by providing a member each month to write a blog post about a topic of their choosing. TSCPA continued working with AICPA to encourage members to acquire and maintain the Chartered Global Management Accountant (CGMA) designation. The CGMA designation was created by AICPA and the Chartered Institute of Management Accountants (CIMA) for CPAs who work in business, industry

and government. Designation holders have access to an exclusive suite of benefits. There are currently more than 3,000 CGMAs in Texas. The designation is available to qualifying AICPA members, and TSCPA members who are also AICPA members receive a discount. Beginning in January 2015, applicants for the CGMA designation are required to pass a strategic case study exam in management accounting. For that reason, TSCPA hosted CGMA events in some of the large chapters. The events featured one hour of CPE provided by AICPA’s Barry Payne and Ash Noah, followed by an hour of networking. Payne and Noah shared what AICPA and CIMA are hearing from finance leaders worldwide on how finance is evolving and what the CFOs of the future are doing to prepare themselves and their teams. The Business & Industry Center on TSCPA’s website is an important area for the latest professional news, relevant continuing professional education, connections with other members, research information, and much more. The site has specialized neighborhoods, including CFO, Education, Energy, Healthcare, Government, Service Industry, Internal Auditors, Manufacturing and Nonprofit. The neighborhoods are updated as needed. TSCPA also keeps members informed through the Viewpoint e-newsletter, the B&I E-ssentials newsletter and Today’s CPA magazine, as well as the various social media channels. For additional opportunities to network and learn, TSCPA schedules behind-the-scenes company tours for B&I members. San Antonio members participated in Behind the Scenes with Ranger Creek Brewing & Distilling in September, and Dallas business and industry members participated in Behind the Scenes with Community Beer Company in November. After each tour, there was time for networking. Work is underway to set up behind-thescenes events in the Fort Worth and Central Texas chapters. This year marks the 100th anniversary of TSCPA and the centennial anniversary of the CPA profession in Texas. In May, you’ll begin hearing more about TSCPA’s plans for the year’s celebrations. It’s more important than ever for CPAs to stay connected to their profession so they can guide critical business decisions, drive strong performance and actively serve their communities. TSCPA and the chapters are here to provide access to the people, information, services and resources needed to succeed in the diverse range of companies and organizations that make up today’s environment. We encourage you to visit the TSCPA website at tscpa.org or contact your local chapter to learn more. n

Mark Lee

John Sharbaugh

can be contacted at Mark.Lee@aglife.com.

can be contacted at jsharbaugh@tscpa.net. Today’sCPA

WHAT DO YOU GET WHEN YOU CROSS A LAWYER AND A CPA? A healthy bottom line – because we regularly partner with accountants and financial advisors to make sure that our clients, and theirs, receive the best advice possible. Bank on it.

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TAX TOPICS

Employees’ Non-Taxable Fringe Benefits – Seven Mistakes Made Most Often

By Greta Hicks, CPA | Column Editor

on-taxable fringe benefits are not a part of wages, and for easy W-2 and income tax preparation, they deserve a separate account on the general ledger. Two of the newest identified fringe benefits are cell phone and local lodging. Cell phones provided to employees will be treated as a non-taxable working condition fringe benefit or de minimis fringe benefit. As such, the value of the cell phone use for personal versus business is not included as taxable wages to employees, but the cost of the cell phone is fully deductible by the employer. See Notice 2011-72. Typically to be deductible, lodging needed to be away from home. The Internal Revenue Service (IRS) released their final regulations §1.162–32 and made the announcement in T.D. 9696, IRB 201443 that under certain conditions, local lodging is treated as a tax-free fringe benefit if ALL conditions are met. • The lodging is necessary for the individual to participate fully in or be available for a bona fide business meeting, conference, training activity or other business function. • The lodging is for a period that does not exceed five calendar days and does not recur more frequently than once per calendar quarter. • If the individual is an employee, the employee’s employer requires the employee to remain at the activity or function overnight. Please see “Local Lodging Deductible … Maybe” in the Tax Topics section of the January/February 2015 issue of Today’s CPA for more information.

Seven Mistakes Made Most Often No. 1 Mistake. Often missed employee fringe benefits include 100 percent deductible meals and food items furnished for employees. Flag these items to be 100 percent deductible meals for employees, NOT 50 percent deductible meals and entertainment provided to customers or prospective customers. • On-premises meals are tax free to employees under Code Section 119. Examples include coffee, beverages, donuts, etc. • An employer-operated eating facility is a de minimis fringe if it is located on or near the employer’s business premises and if its revenue normally equals or exceeds its direct operating costs. (Note: Watch for change! In an attempt to do away with the meals provided for employees in Silicon Valley, the IRS is doing a study. If the IRS is successful in Silicon Valley, the decision will affect employees in other industries.) • Food or beverage expenses of crews of certain drilling rigs and certain commercial vessels, but not fishing vessels. • Fruit, cookie or gift baskets provided to employees on account of illness, outstanding performance or family crisis. Section 274(e)(6) • Holiday gifts – do not include value of gift: turkey, ham or other 6

item of nominal value at Christmas or other holidays, in wages. No. 2 Mistake. Note: If cash, a gift certificate or another similar item, include the value of that gift as extra salary or wages regardless of the amount involved. • Occasional cocktail parties, holiday parties, group meals or picnics for employees and their guests. No customers are allowed! • Lunch ordered in for employees during a staff meeting. • Supper or supper money provided occasionally so that the employee can work overtime. • Employee, stockholder, etc., business meetings – expenses incurred by a taxpayer that are directly related to business meetings of his/her employees, stockholders, agents or directors. Section 274(e)(5) Today’sCPA

• Meetings of business leagues, etc. – expenses directly related and necessary to attendance at a business meeting or convention of any organization described in Section 501(c)(6) (relating to business leagues, chambers of commerce, real estate boards and boards of trade) and exempt from taxation under Section 501(a). No. 3 Mistake. Note: Meals as a part of moving expenses are no longer deductible; therefore, if paid by the employer, they are taxable as wages to the employee. Other awards and prizes are taxable wages. No. 4 Mistake. Bonuses, prizes or awards received for outstanding work should be shown in wages. These include prizes, such as vacation trips for meeting sales goals. If the prize or award received is goods or services, include the fair market value of the goods or services in wages.

Vehicles Companies, especially small businesses, most commonly treat personal use of company autos and business use of personal vehicles incorrectly. No. 5 Mistake. The value of personal use of a company vehicle is treated as taxable wages. Greta Hicks, CPA

No. 6 Mistake. If there is no documentation on business use of the company auto, all use of the vehicle is taxable as wages to the employee. No. 7 Mistake. Monthly auto allowances paid for the employee’s vehicle are taxable as wages if there is no documentation of business use of the auto.

More Complex Than Ever There are certainly more taxable and non-taxable fringe benefits for employers and employees. The ones discussed above are the most common benefits provided by small business employers and the most often where mistakes are made either by employers or tax return preparers. Taxable and non-taxable fringe benefits are much more complex now than historically and require either separate accounts in the general ledger and/or analysis before the employee’s W-2s and the company’s income tax returns are prepared. Help your clients develop a system for capturing these benefits during the year rather than having to perform time-consuming analysis during the rush periods of return preparation. n

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.

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Today’sCPA March/April 2015

6/16/14 12:40 PM

BUSINESS PERSPECTIVES

Earnings Quality

By Mano Mahadeva, CPA, MBA | Column Editor

ong-term creditors are primarily concerned with evaluating the ability of a company to service its debt and long-term solvency. Short-term creditors are more concerned with immediate liquidity, as they expect to get paid in a much shorter timeframe. Equity investors deal with the residual risk and ultimate value of the company. Regardless of the objective, it is important for any constituency to evaluate the earnings quality of the company to make investment or credit decisions. Earnings quality is important for a company’s financial wellbeing, which improves capital market efficiency. Companies with high earnings quality are considered less risky because their earnings can be taken to the “bank.” Therefore, these companies are accorded with a higher price-to-earnings multiple reflecting this lower risk and for their use of conservative accounting policies. What is earnings quality? Well, there is neither a set definition nor a particular set of criteria to determine this. Mere compliance with Generally Accepted Accounting Principles or other standards does not ensure earnings quality. And accounting choices involve judgment, which means different persons may interpret the economics of a transaction differently, due to the existence of different companies, in different industries, each with a differing environment and circumstance. It is important for an equity investor or creditor to understand earnings quality to gain a clear understanding of a company’s true state of financial health. This is a very complex undertaking and requires expertise across areas of accounting, finance, strategy and governance, as well as a strong knowledge of the industry in which a company operates. Companies with high earnings quality have compelling traits, some of which are observable. Ethical culture and clear, concise and transparent disclosures are two such traits. We have seen leaders set an ethical culture at the “top” and drive this behavior throughout their organizations. Having the presence of a strong governing board comprised of independent directors and a strong audit committee would round out a strong governance function and enhance earnings quality at this company. The voluntary disclosure of information by a company, as a complement to financial statements, can also help improve investor confidence. This could take many forms – press releases, webcasts, conference calls or any other form of announcement. More disclosure, in itself, does not mean it is better information, but the clarity of disclosure that covers the application of accounting principles, its timing and the use of estimates will help improve earnings quality. There are many key measures that can be used to determine earnings quality. Generally, earnings should follow the underlying economic activity of a business, converting accounting standards Mano Mahadeva, CPA 8

to reality. Earnings are typically estimates of subsequent cash flows. An analyst may confirm this by taking a look at the ratio of cash flow from operations to net income of a company. The closer they are to one, the higher the quality of earnings, as it is more difficult to manipulate cash flows; so is the use of financial ratios – activity, solvency, liquidity and debt ratios – to compare risk and return relationships of firms of different sizes and in distinct industries. All four ratios are interrelated and rely on integrated use to provide for earnings quality of a company based on its competitive position, financial strength and profitability. So how do questions arise about earnings quality? Lower earnings quality does not necessarily mean the company is following bad or aggressive practices. We have to keep in mind that some companies may have a lower earnings quality because of what they do or where they are in a business cycle. So companies dealing with a volatile business, such as working with derivatives or commodities, may show greater volatility than one which is not. Similarly, a higher growth company may show lower quality due to its rapid growth curve with cash well behind. At times, companies get ahead of themselves by setting high expectations with the hope that reality catches up! This gap becomes too large, due to a market turndown, and we witness fallout. The difference between earnings and cash are the accruals. And accruals can be estimated accurately, manipulatively or incorrectly. Manipulative accruals result in an unusual rise in accounts receivable, unusual capital expenditures, inventory build ups and large and frequent special or one-time transactions. Incorrect application could mean the use of an inappropriate metric. In a high-earnings quality setting, the best choice is one that reflects the economics of the underlying transaction. Quality financial statements should reflect economic reality. Economic reality is not always easy to compute because companies dump everything into their reports and leave the interpretation to investors. In the long run, in an economic recovery, companies that reflect high-quality earnings will be rewarded with higher stock prices than those that muddy the waters. n

is Chief Financial Officer with Solis Health in Addison, Texas. He serves on the Editorial Board for TSCPA. Mahadeva can be reached at mmahadeva@solishealth.com. Today’sCPA

ACCOUNTING & AUDITING

IFRS Adoption in the United States: The Latest Developments

By C. William Thomas, CPA, Ph.D. | Column Editor

decision on the potential adoption of International Financial Reporting Standards (IFRS) by U.S. issuers has been a topic of great interest in recent years. In 2008, the Securities and Exchange Commission (SEC) recommended that U.S. Generally Accepted Accounting Principles (GAAP) be replaced with IFRS by 2015. However, these plans were placed on hold with the financial market collapse in 2009 and 2010. Since the plans for complete IFRS adoption were put on hold, the SEC has been very non-committal on when, if ever, it would require adoption of IFRS in the U.S., and finally decided to put it on hold indefinitely. U.S. companies and investors are anxiously awaiting a decision by the SEC as the impact on worldwide capital markets would be quite significant.

The Potential Path Forward On Dec. 8, 2014, the new Chief Accountant of the SEC James Schnurr gave a speech before the American Institute of CPAs National Conference that, in part, discusses the status of IFRS issuance in the U.S. Schnurr began by assuring listeners that the focus on IFRS continues to be a top priority of the SEC and that clarity on what action, if any, that would be taken would hopefully come sooner rather than later. Although no official plan of action was laid out for the adoption of IFRS by U.S. issuers, Schnurr implied that, rather than requiring U.S. companies to use IFRS, the SEC might move toward a system that reports the IFRS information on a voluntary, additive basis, in addition to U.S. GAAP. Voluntarily reporting IFRS information in addition to GAAP would be costly to the companies that choose to do so, making widespread adoption unlikely. However, Schnurr suggested that this voluntary system may be a good starting point for IFRS issuance in the U.S. “Under this line of thinking, issuers that do not believe IFRS-based information would be beneficial to investors would not be forced to undertake what we understand to be, in some cases, significant implementation costs,” he said. Schnurr emphasized that the voluntary reporting system is just a possible example of an action that may be taken by the SEC in the future. “Based on the progress of our collective efforts, I am hopeful to be in a position in the coming months to commence discussions with the chair and the commissioners about the different alternatives for potential further incorporation of IFRS and the related issues/concerns of each C. William Thomas Today’sCPA March/April 2015

alternative with the objective of reaching a recommendation on what, if any, further incorporation or use of IFRS by U.S. registrants would be permitted or required,” he stated.

Will This Plan Work? The voluntary reporting system informally proposed by Schnurr raises some key questions: Will U.S. companies adopt the voluntary reporting of IFRS-based information? And if so, how many? The benefits received from voluntarily reporting IFRS-based information in addition to GAAP would have to outweigh the costs before any rational company would do so. This cost-benefit dilemma will likely limit the number of initial adopters. The SEC is also uncertain at this time how successful this proposed plan may be. When International Accounting Standards Board Vice Chairman Ian Mackintosh was asked how many companies might take it up, he responded: “We don’t know. I have no real feel.” However, despite the cost, reporting IFRS-based information could be beneficial to some U.S. companies. For example, U.S. companies that compete with foreign private issuers using IFRS may be willing to adopt the voluntary reporting. This would provide their investors with more comparable information, as well as provide benchmark information that may be useful for the company. Also, implementing and adjusting to IFRS requirements early could provide a future competitive advantage for companies, especially if the SEC decides to make IFRS compliance mandatory. These early adopters would be able to fine-tune their IFRS reporting system over time without the pressure of a more rapid mandatory conversion. SEC Commissioner Daniel Gallagher said that this plan could help establish whether there is a demand for IFRS reporting for U.S. issuers. However, Mackintosh stated that it might not be a relevant test for market demand if few choose to adopt the option. Final Thoughts Once again, the SEC has continued to be vague about a set plan. And although the possible plan proposed by Schnurr provides some insight on the SEC’s stance on this important topic, there is still a great deal of uncertainty regarding what will happen in the future. Many doubt that the benefit of voluntarily providing IFRSbased information will outweigh the cost, therefore deterring widespread adoption. In short, if you want people to do something, you have to require it, rather than ask them to do it as an option. n

is 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. 9

TECH ISSUES

Do You Have the Right Accounting Software?

By Randy Johnston, Guest Columnist

ccounting software helps manage businesses from small to large. Is your organization running the right software? Is the pain of change so great, you’ll stay on an older version or the wrong size and type of software? Are your people frequently entering or reentering data? Do the reports you receive lack the information needed? Are you constrained by when and how you upgrade your accounting software and the supporting products? If you answered “yes” to any of these questions, you may not be on the right software system. You may need to upgrade to a current version, or you may need and want to replace the software with a product that is a better fit for the organization. It is important to go through a selection process like that outlined at the K2 CPE site for accounting software: accountingsoftwareworld.com/articles-whitepapers/selection-steps. Rarely is it in the organization’s best interest to enter the sales process too early. Take the time to analyze your needs, and determine potential product solutions before any contact is made with a publisher or software partner. Most vendor websites are sophisticated enough to obtain your contact information and identify you as a prospect without your permission. Take a long-term view of your organization’s needs. Most accounting software systems are kept 10 years or more, and you should work on the assumption that picking the right system will cost or save money for a very long time. Consider the size of the business you need to support. There are different levels of software to support different levels of business, as depicted in Figure 1. Over or under buying software can cost more during the period of ownership by requiring additional manual procedures in simple products or by adding unnecessary complexity in products that are too big for the need. From our analysis and understanding of the accounting software market, accounting software is far from one size fits all. There are a few general products that are well known and are recommended and used broadly. Examples of these products include: Intuit QuickBooks, Sage 100 (formerly known as MAS 90), Microsoft Dynamics GP (formerly known as Great Plains) and SAP All-In-One. Each of these products has good core functionality, an add-on ecosystem of thirdparty solutions that address many of the features not included in the base product and are deeply understood by consultants. A consultant on one product will rarely know more than the product in which he/she specializes. If your needs are complex, you’ll likely need to consider consulting expertise during the selection process. However, it will be a challenge to find experts who have expertise in more than one product OR who aren’t biased by a product they are selling. We would prefer to hear from you if any part of the selection process is unclear or if you are having trouble locating an acceptable consultant. 10

Figure 1

Figure 2

Comparing The Options

Cloud

On-Premise

• • • • • • • • • •

Subscription based services Maintained by 3rd party Data stored somewhere else Multiple solution providers Execution through a browser Data secured by third party Immature - limited features Very scalable How will my data convert Built-in disaster recovery

Purchase the solution Stored and maintained locally Store & protect data locally Single source solutions Client/server implementation Data security is up to you Mature code is feature rich Heavy investment to scale Data fairly easy to convert Disaster recovery is up to me

Consider the Solutions There are approximately 300 accounting software products sold in the U.S. market. Around 40 products sold are Software as a Service (SaaS noted in options below) that run completely in a web browser. As a rule, the SaaS products will have fewer features than the traditional products offered by publishers during the last 20-30 years. Most of the products that can be installed in-house are also offered in a hosted version today. Further, the pricing of these traditional on premise products is usually available in two forms: monthly subscription or purchase with annual maintenance. Entry level products today include: • Intuit QuickBooks and QuickBooks Online (SaaS) – both are U.S. market leaders in their respective categories. • Sage 50 Pro, Premier and Quantum – Good inventory, costing, payroll and reporting capabilities make this product Today’sCPA

an attractive choice for slightly larger organizations that need more users. • CYMA – notable for the payroll and human resources capabilities and low cost of ownership. • Wave (SaaS) – a free SaaS product with good accountant access and a payroll option. • Accounting Power (SaaS) – a product offered through accounting firms that has good accounting capability, including payroll.

Check your event conﬁrmation for the conference’s handout website address. Handouts will be available for download beginning April 29, 2015. Handout WILL NOT be available onsite.

improve their personal and organizational productivity.

Who should attend:�Busy accounting and ﬁnancial professionals who want to

Program level:�Overview Advance preparation:�None Instructional delivery method:�Group-live demo and discussion using color

CPE credit:�16 hours Specialized Knowledge and Applications Course developer:�K2 Enterprises Prerequisites:�Fundamental knowledge of hardware, software, and technology

Call (972) 687-8500 or (800) 428-0272 In State Only

with credit card information

TSCPA CPE Foundation, Inc. 14651 Dallas Parkway, Suite 700 Dallas, TX 75254

• Mail a check payable to

• Fax to (972) 687-8696

• Website www.tscpa.org

nf Attendee n description of your needs.

Three Easy Ways to Register:

-1442

Registration Options:

Small to Medium Business (SMB) products today include: • Open Systems TRAVERSE – a product that has good personalization capabilities, and has specialties in a number of verticals, including nonprofit, services, distribution and flexible packaging. • Sage 100, 300 and X3 – Sage has more installations in the U.S. market and globally than any other accounting software publisher. These products are frequently used in distribution and manufacturing, and have broad third-party support to fit many vertical markets. • Microsoft Dynamics GP, SL, NAV and AX – Microsoft has four different offerings with unique capabilities in each of the product lines. Dynamics GP is well known for general accounting, costing and inventory. The NAV and AX lines have the most customization capability. • NetSuite (SaaS) – This publicly held company has good CRM and eCommerce integration in its offering. It also handles international currencies. • SAP Business ByDesign (SaaS) – This is a comprehensive, integrated financial and distribution product that offers a multi-perspective GL for unique reporting needs. • Intacct (SaaS) – As promoted by the American Institute of CPAs’ (AICPA’s) CPA2Biz unit, this product has inventory, costing and third party integration, as well as entry-level accounting capability.

Non-Proﬁt Organization U.S. POSTAGE PAID Texas Society of CPAs Permit No. 195

Randy Johnston

projection

trends

ABOUT THIS CONFERENCE

Texas CPA Technology Conference

Enterprise (ERP) products today include: • SAP All-in-One – This is one of the leading high-end ﬁcate # systems globally. There are few business situations that SAP can’t handle. • Oracle Financials – Oracle has purchased a broad number of companies and integrated the functionality into their a member of TSCPA. Society Name:_____________ mainstream product. Much of Oracle’s revenue comes from their robust database. Exp. Date • Infor Lawson and FMS – Infor has been buying software Total $ companies that specialize in higher-end distribution and A GLANCE manufacturing. • Workday (SaaS) – The product created by this company is a ogram No: TC02 new generation Enterprise product that doesn’t require a lot of infrastructure and could reasonably compete at the high end of the market.

These examples are not recommendations, because we believe you need a reasonable system selection process to fit a product to your needs. Some attributes to consider when buying SaaS/Cloud products vs. traditional on-premise products that can be installed in-house or hosted are listed in Figure 2.

If a product is a good fit now, it will be a good fit later.

What to Do If you determine your organization needs to replace accounting software, attend a CPE course on technology offered by the TSCPA CPE Foundation. Once you understand some of your options and the process, begin a needs analysis. Spend a few days in demonstrations of how the potential products fit your needs; then negotiate your contract, make the purchase and implement. Vendors will do everything they can to shorten the sales cycle and get you to make a decision fast. This is to their advantage as a method to eliminate the competition. If a product is a good fit now, it will be a good fit later. Don’t overanalyze, but the worst mistake of all is not spending enough time on determining needs and due diligence. Be thorough in your selection process! n

Texas CPA Technology Conference

TSCPA’s 2015 Texas CPA Technology Conference will be held in Richardson on May 4-5 and in Houston on May 7-8. For more informationMay and to4-5, register, visit the CPE section of 2015 TSCPA’s website at tscpa.org.

Hyatt Regency North Dallas, Richardson May 7-8, 2015 is a shareholder at K2 Enterprises, where he develops and presents continuing education courses to business professionals across North America. You may contact him at randy@k2e.com. Westin Memorial City, Houston

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nt & Detect Spreadsheet Errors of Things

Today’sCPA March/April 2015

itical to Every Organization

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SPOTLIGHT ON CPAS

Accounting Under the Rotunda Lubbock CPA Sees a Need for His Colleagues in Government

By Anne McDonald Davis

exas State Sen. Charles Perry, CPA-South Plains, encourages his fellow CPAs to participate in government, and he says you don’t have to run for office to do it. “We all benefit from an informed and educated electorate,” he explained. “Just get involved on some level – local, state, national. We need more good people!” He added, smiling, “And I don’t know any bad CPAs.” First elected as a representative from west Texas’ House District 83 in 2010, Perry won a special election in 2014 to fill a vacancy in the Senate. Although surrounded by many attorneys in the state’s law-making body, he says that when it comes to budget issues, someone with accounting expertise naturally becomes a “go-to” person. He recounted: “If you have an aptitude for numbers, you’re ahead of the curve. In fact, understanding good business practices and cost accounting puts you way ahead. Some have other gifts, so that’s where they apply their strengths. By my second session in the House, I was on the Appropriations Committee. It’s been rewarding to be able to help in that capacity, to be effective and serve in a leadership role.”

Country Life Born in Abilene and raised in Sweetwater, Perry said that west Texas was a great place to grow up, and he stands by the rural values he learned as a boy. “Do what’s right; know there are consequences when you don’t,” he said. He eventually chose Texas Tech for his higher education partly because the university was “still west Texas.” He added: “A great institution. A lot of my buddies and other kids from the area were going to Tech. A driving force was that my brother went there.” Choosing a course of study was a little less clear in the beginning. Once upon a time, Perry thought about becoming a shop teacher or park ranger. He laughed: “My high school shop teacher 12

State Sen. Charles Perry, CPA-South Plains

The Perry Family

told me that the day was coming when there probably wouldn’t be shop teachers. As for being a ranger, I figured out that the park service probably wasn’t going to send me straight to Yellowstone so…” The more Perry learned about the business school at Tech and the many applications of an accounting degree, the more he became convinced to head that direction. (He still enjoys nature, but settles for the occasional quail hunting trip. And he still likes working with wood.)

retired public schoolteacher; daughter, Jordan, is a funding coordinator with the Make-A-Wish Foundation and son, Matthew, is studying for his master’s degree in addiction counseling and is currently working at a treatment center. Back home, Perry has been on “just about any board involving kids.” He’s a past president of the Lubbock Boys and Girls Club and has served on the National Council on Family Violence.

Thoughts of Home Since Texas has citizen legislators with nominal salaries, much of Perry’s focus has to remain in his practice in Lubbock. “I’ve got to get back soon and catch up on tax returns,” he conceded. He also misses being home. “I’m fortunate to be married to my wife, Jacklyn, of 32 years. It takes an understanding spouse to accept the time this takes – she has been very supportive. Our kids were out of high school when I ran … can’t say I would recommend it to a parent with children still at home. I feel like I’m here for a calling, but it’s not for everyone. It takes a lot to meet all these expectations and keep perspective.” The Perrys are “all Tech,” he said, a Red Raider household where he is “surrounded by people with a heart for others and a willingness to serve.” Jacklyn is a recently

The Golden Rule Perry said his mother was a strong person who raised him to follow the Golden Rule. “If we would just learn to treat each other the way we want to be treated, the world would be better. We all fall short, but it’s important to try.” Feeling blessed with his family, profession and public service, he concluded: “I can’t say enough good things about being a CPA. We take it for granted sometimes, but it’s a real privilege. And there is absolutely a need for CPAs in government. We bring a whole different perspective to the process. “It may be kind of stepping out of the norm for some of us. I certainly never imagined being a legislator. In fact, I would have laughed at that idea 25 years ago. But it’s never boring. For one thing, 800,000 people now have my phone number! It’s very challenging, but very rewarding.” n Today’sCPA

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CHAPTERS

Chapter Presidents in Business and Industry Jimmy Hudson Permian Basin Chapter

Sean Ihorn El Paso Chapter

Diane Kliem Victoria Chapter

Martha Perez San Antonio Chapter

By Rhonda Ledbetter | TSCPA Chapter Relations Representative

n keeping with the theme of this issue, the column focuses on chapter presidents who work outside of the public practice realm. They provided responses to questions ranging from their first jobs as CPAs to their advice to those entering the profession in the future, as well as how their experiences working in industry have helped them in their current volunteer position. Those participating, in alphabetical order by last name, are: • Jimmy Hudson, Permian Basin Chapter; • Sean Ihorn, El Paso Chapter; • Diane Kliem, Victoria Chapter; and • Martha Perez, San Antonio Chapter.

CPA Career, Job Responsibilities Reflecting the adaptability required of CPAs, there is tremendous range in the size of companies these individuals have worked for, from two to 137,000 employees. Only one person worked in public accounting at some point since being certified as a CPA. Previous jobs held include SOX program manager for a nationwide full-service truck-stop chain, state tax manager with a group of real estate-related businesses operating throughout the world and steel company branch controller. In their current employment, none of the four work in the same arena. They are now in media planning and buying, oil and gas operating, law and higher education. There were several stories about interesting job duties. • One CPA told about his experience with an employer’s separate entity overseeing the operations of the company aircraft (which was shared with an unrelated third party). “After I began managing the operations, a letter from the comptroller’s office led to the discovery that sales tax had not been remitted when the plane was purchased. Although I was new to this role, I had to plunge into my first cash call and obtain enough money to pay the sales and use tax on a $2.5 million aircraft. It was pretty stressful, but a good trial by fire.” • Another person’s story evolved from managing the accounting for a receivables factoring company. The CPA was involved in every aspect of the

business. Some days the CPA was running credit checks and verifying receivables or helping with collections; others they were making sure there were enough coffee and doughnuts in the waiting area. They ended up dealing with the customers a lot more than planned. The most challenging aspect was hearing some heart-wrenching stories from small business owners who needed cash flow to help keep their businesses going. • In 1998, to prepare for Y2K and the threat of crashing computer systems, one CPA’s employer put together a team upon which he/she served. The job was to test new computer systems and try to break or stump them to discover bugs and needed fixes. They were given free rein to think of every possibility related to accounting, inventory, purchasing, human resources and databases, then document the problems or roadblocks encountered. As the CPA commented, “It’s unusual to get a request to ‘break it.’” • Duties as a financial analyst at a private university included assisting in a bond issue – the first time the institution had issued fixed-rate bonds. The CPA collaborated in the preparation of the official statement and participated in the university’s presentation to two reporting agencies. When discussing a busy season, one person referred to two each year: audit season, beginning in June and ending in October when bound financial reports are delivered, and early spring when form 990s are prepared in-house. Another explained that quarterly and annual financial periods include preparation of SEC-style financials to adhere to bond covenants held. Mention was made of workload compression in January after a Dec. 31 fiscal year end.

Work/Volunteer Skills and Chapter Involvement Several of the participants talked about skills different from those used in the public practice/ financial advisor arena that are helping as a volunteer leader. Working every day with individuals from many different backgrounds brings team-building skills into play when a multidisciplinary team means having to communicate with those not as familiar Today’sCPA

with the CPA’s point of view as another accountant might be. There is also the need to compromise to meet common goals. When serving in chapter leadership, it’s important to recognize that while all might be accountants, there are different skill sets. Martha Perez, CPA-San Antonio, explained, “Handling the accounting for the university, two high schools and a foundation we manage has given me a much more in-depth understanding of the intricacies associated with running a complex multi-million dollar corporation.” She added: “This has helped me build my leadership, time management and organizational skills and become more flexible and able to adapt to change. I feel I’m able to use these skills to provide value and help guide a large chapter of TSCPA during my tenure as a volunteer leader.” Most have become involved in their chapter through the encouragement of a specific person, such as Ryan Bartholomee, CPA-Permian Basin; Edie Cogdell, CPA-San Antonio; and Phil Davis, CPA-Permian Basin. Sid Glandon, CPA, was cited as an influential accounting professor who inspired a CPA career and then brought the person into chapter leadership.

Career Rewards and Challenges The conversation shifted gears to the most rewarding aspect of their career. There were varied responses. “As an attorney, I utilize many of the skills that I learned as a CPA,” said Diane Kliem, JD, CPA-Victoria. “While many lawyers’ eyes glaze over when going over financial statements, receipts, tax returns and other such items in legal matters, I’m in my comfort zone! Due to my former accounting-related roles as controller and human resource manager, I am at ease discussing employment issues, collection matters, credit policies and many other areas. It’s rewarding to be able to utilize my CPA experience in relating to my law firm’s clients.” However, a career as a CPA combines rewards with challenges. Those cited were: • Finding, developing and retaining talented employees, as well as relating to and engaging younger staff. • Staying current on continuing professional education. • Time management, to fulfill obligations to the employer, family and community. • Keeping up with rapidly changing technology to continue operating in an efficient and effective manner. • Employer growth and expansion into new product lines. The Next 10 Years for CPAs Working in Industry Turning to the future, the group considers the one big thing in the next 10 years that will be a game-changer for CPAs working in industry. Sean Ihorn, CPA-El Paso, said: “I feel that data analytics is changing the face of how CPAs in industry work. We’re going to have to become experts in analyzing large quantities of data and making smart conclusions based upon that. I think that has been the case with larger companies for a while, but it has now filtered down to smaller businesses as well. Even with small companies, if you can’t analyze data, you will have trouble competing.” Technology will be a game changer for any CPA working in industry. Versatility in its use will make him/her a more valuable asset Today’sCPA March/April 2015

to any organization. This will be especially true as businesses try to find innovative ways to be efficient yet accurate in their financial systems and reporting.

Advice to Students Considering a Career in Accounting To close the discussion, the group was asked what advice they would give to students who are considering a career in accounting.

Technology will be a game changer for any CPA working in industry. Versatility in its use will make him/her a more valuable asset to any organization.

“One of my favorite parts of my job is getting to help with random projects that may pop up and the feeling of achievement that comes with overcoming new obstacles,” said Jimmy Hudson, CPA-Permian Basin. “Even if you don’t feel you know how to do something, be willing to learn if your employer presents you with an opportunity. Any reasonable person will expect a learning curve to come with your attempt and in the end, you may find yourself a better professional for accomplishing the task.” Ihorn commented: “I’m adjunct faculty at the University of Texas at El Paso, so I deal with students on a fairly regular basis. I stress to them that public accounting is not the be-all, end-all for someone with an accounting degree. It’s a fabulous opportunity for those who enjoy it, but their career options will be so varied that they need to go out and find the niche area that will allow them to be excited to wake up each morning and go to work. If that’s in public accounting, great; if not, there will be all sorts of other choices.” “Even if you’re not sure what you want to do, accounting is a career that will serve you well,” stated Kliem. “The accounting degree goes well with further education, such as law school, if that’s something the student is considering. Being a CPA gave me a lot of credibility as a new attorney.” She added: “The CPA certification is widely respected and will serve you well. You’ll understand budgeting, projections, revenue and income drivers, cash flow, financing, credit and collections and their importance to a business.” Perez stressed, “Do not wait to sit for the exam.” She added: “Also, during school consider a work-study position in the finance area at your university, or an internship in public or industry depending on where your interests lie. You might be surprised at everything you can be exposed to while you’re still in school. This can ultimately help you decide whether to pursue work in audit or tax, or it might help to decide whether you prefer to work in industry.” n 15

CAPITOL INTEREST

CPAs at the Capitol and in the Legislature

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

PAs were everywhere at the Capitol! On Jan. 27, 2015, CPAs were on the floor of the House, on the floor of the Senate, in the galleries, in the halls, in the Capitol Grille and in the offices of legislators. About 250 CPAs descended on the Capitol that Tuesday for TSCPA’s biennial visit to the Legislature in connection with the TSCPA Midyear Board of Directors Meeting. (For a summary of the meeting, please see page 20 of this Today’s CPA issue.) Not only were CPAs there to offer our support to legislators and inform them of our legislative priorities, but this year, CPAs were there to accept official legislative recognition of the CPA Centennial Celebration. Certified Public Accountants were created in 1915; the Texas State Board of Public Accountancy (TSBPA) was legislated into existence and the Texas Society of CPAs (TSCPA) was organized in the same year. The CPAs at the Capitol event started with CPA and TSCPA member Rep. John Otto (R-Dayton) offering House Resolution 183 (see Figure 1) recognizing the 100th anniversary of the profession. The resolution was co-authored by the other CPAs in the House: Reps. Angie Chen Button (R-Garland), John Frullo (R-Lubbock), Scott Sanford (R-McKinney) and Phil Stephenson (R-Wharton). All of the CPA reps gave oral endorsements of the resolution, and the gallery was full to the brim with CPAs, TSBPA members and their friends. TSCPA’s Chairman Mark Lee and Chairman-elect Allyson Baumeister, along with TSBPA’s Presiding Officer Tom Prothro and Assistant Presiding Officer Coalter Baker (also members of TSCPA), were on the floor of the House for the presentation. As soon as the House festivities were over, the above-mentioned four CPAs and all of their friends moved to the Senate where CPA and TSCPA member Sen. Charles Perry (R-Lubbock) offered Senate Resolution 18 (see Figure 2), also congratulating CPAs on their 100 years of service to the public. (Please see the Spotlight on CPAs article in this Today’s CPA issue, which highlights Sen. Perry.) It was a good way to start the day at the Capitol. TSCPA appreciates Otto and Perry and their wonderful staffs for making it all possible. CPAs fanned out over the Capitol after the presentations to talk to legislators or their staffs. CPAs reported a good reception by all and a great reception by many. The day was capped by the evening festivities. TSCPA held a reception for legislators and their staffs continuing to celebrate the CPA centennial. Speaker Joe Straus (R-San Antonio) was the keynote speaker. Lee presided and Prothro, representing TSBPA, read a congratulatory letter from CPA and TSCPA member Congressman Mike Conaway (R-Midland). Conaway was a member of TSBPA for seven years and served as the presiding officer for five of those years. We ended the program with a video 16

Front row: TSCPA Chairman Mark Lee, CPA-Houston; TSCPA Chairmanelect Allyson Baumeister, CPA-Fort Worth; and Speaker of the House Joe Straus. Back row: Coalter Baker, CPA-Austin; Tom Prothro CPA-East Texas; and Rep. John Otto, CPA-Southeast Texas.

presentation highlighting TSBPA’s 100 years of service. Then it was party time! About 250 CPAs and their guests were joined by CPAs and TSCPA members, Railroad Commissioner David Porter, Secretary of State Carlos Cascos, 47 House members and four senators who all enjoyed hors d’oeuvres, spirits and one another’s company. A good time was had by all!

The Legislators Go to Work Although the legislative session convened Jan. 13 with the election of Straus to his fourth term as speaker of the House, the Texas Constitution does not allow the Legislature to debate or vote on any bills during the first 60 days of the session unless the topic is designated as an emergency by the governor. As of press time, Gov. Greg Abbott had yet to designate any emergencies. So, the first 60 days will be used to organize the Legislature. Lt. Gov. Dan Patrick announced his committee appointments early in the session. Patrick reduced the number of Senate committees from 18 to 14 and named only two Democrats as committee chairs compared to six last session. Perry was the only freshman senator named to chair a committee. He presides over the Agriculture, Water and Rural Affairs Committee. Perry is the only CPA serving in the Senate. As predicted, the Senate changed the long-standing two-thirds rule to a three-fifths rule, meaning it now only takes 60 percent Today’sCPA

of the senators to agree to bring a bill to the floor for debate. This gives Senate Republicans complete control of the Senate agenda, provided they can agree among themselves on what bills to debate. Straus announced the House committees a couple of weeks later. Unlike the Senate, committee chairmanships were doled out proportionally to the number of Republicans and Democrats in the House, giving chairmanships to 13 Democrats and 27 Republicans. Otto was named chairman of the important and powerful Appropriations Committee, the committee that writes the state budget. Rep. Angie Chen Button was selected to chair the Economic and Small Business Development Committee. Button will also continue to serve on the Ways & Means Committee, the tax writing committee of the House, as well as the Rules and Resolutions Committee. Another CPA and TSCPA member, Rep. Phil Stephenson, will serve on Investments & Financial Services and Pensions. Tom Frullo, who has an inactive CPA license in another state, was selected to chair the House Insurance Committee and will also serve on the Culture, Recreation and Tourism Committee. Rep. Scott Sanford, another House CPA, will serve on Juvenile Justice & Family Issues and Land & Resource Management. The bill filing deadline is March 13. By the time you read this article, legislative committee hearings will be in full swing. After March 13, bills can be scheduled for a vote. Expect to see bills erupt from the Senate after that date, while the House may be more deliberate in the process. It’s a lot easier to operate with 31 members than 150.

TSCPA Legislative Proposal Reducing redundant filings for limited partnerships and professional associations is the primary legislative initiative for TSCPA this session. Both the secretary of state and the comptroller’s office are supportive of this initiative. It’s a little complicated, but with the help of these state officials and our legislative sponsors, we are optimistic a good bill can be drafted and passed. Otto and Perry submitted bill requests for drafting, but we didn’t yet have bill numbers at press time. Tax Cuts According to Otto, who is Appropriations Committee chair, Texas has enough revenue available to craft a budget and provide some tax relief. Legislators are almost giddy over the possibility of reducing taxes for both individuals and businesses. The Senate made a statement when they announced that SB 1 would be a tax-cut bill of approximately $4 billion with it split roughly $3 billion to property tax relief and $1 billion in franchise tax relief. SB 1 is normally the designated budget bill. The budget bill is playing second fiddle as SB 2. While SB 1 has the noted designation, so far the bill has no content. However, Sen. Paul Bettencourt (R-Houston) has filed SB 515, which doubles the school property tax homestead exemption from $15,000 to $30,000. This bill would use up $2 billion of the Bob Owen, CPA

proposed $3 billion in property tax relief. The other $1 billion in relief will supposedly be used to reduce business property taxes, but no bills had been filed at press time. In the House, Rep. Armando Martinez (D-Weslaco) filed HB 52 increasing the homestead exemption from $15,000 to $45,000. That bill would cost about $3 billion in revenue. About 40 franchise tax bills have been filed, including 11 to repeal or phase out the tax. The cost of eliminating the franchise tax is $10 billion for the biennium, which is probably a little more than the budget will allow, even with the surpluses available. All of the other bills reduce the franchise tax in some manner through rate reductions, new tax credits, special provisions for small business or other industry-specific relief. The most talked about franchise tax relief is to continue the 5 percent rate reduction that expires this year or perhaps double that reduction and make it permanent. That has about a $.5 to $1 billion biennial cost depending on the amount of the rate reduction. Another proposal would increase the small business exemption from $1 million to $5 million. According to the bill author, that would reduce the number of businesses paying the franchise tax from 125,000 to 55,000. This bill would fit nicely into the $1 billion number in SB 1. A bill has also been filed to eliminate the franchise tax for entities that show a loss on their federal income tax return.

The Hot Buttons Revisited In the last Capitol Interest article, we mentioned several hot button issues for the session. We were right on target with regard to tax cuts, guns, border security and school vouchers. In fact, the first bills to be approved by a committee were the bills authorizing concealed handguns on university campuses and permitting handgun license holders to openly carry holstered weapons. They may be the first bills passed by the Senate. Border security is also front and center in the budget discussions with differences in approach surfacing between the House and Senate. The Senate also has a school voucher bill that would entitle a student to a voucher equal to 60 percent of the statewide average per-student cost, which could be used to enroll in a private school. While there has also been an active debate going on about repealing in-state tuition for undocumented students, with the lieutenant governor on one side and the speaker of the House on the other, there has only been one bill filed on the issue. Despite that, pundits still believe that in-state tuition for undocumented students will be repealed. Although bills have been filed on abortion, gay marriage, home schooling and charter schools, there has been little written or said about those bills. We will see more as the bills move through the committee process. You can keep up with legislative activity on our blog (http://tscpaatthecapitol.com) or by following us on Twitter @TSCPACapitol. continued on next page

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

Today’sCPA March/April 2015

CAPITOL INTEREST continued from previous page

Figure 1: House Resolution 183 WHEREAS, The Texas State Board of Public Accountancy and the Texas Society of Certified Public Accountants are each celebrating their 100th anniversary in 2015, and this provides a fitting occasion to commemorate the first century of accounting as a licensed profession in the state of Texas; and WHEREAS, From the ancient world to the present day, the public has relied upon the skill and integrity of professional accountants in the conduct of personal, commercial, and public activities; and WHEREAS, In 1915, in order to protect the public and promote the prosperity of the Lone Star State, the Texas Legislature created the Texas State Board of Public Accountancy; it is the mission of this essential regulatory agency to oversee the examination and certification of the accountants of Texas, ensuring that they possess a high level of expertise; and WHEREAS, That same year, the Texas Society of Certified Public Accountants was also created, and today, the TSCPA boasts 20 chapters across the state, with a membership of more than 26,000; these individuals play a crucial role in the success of entities ranging from private businesses and government agencies to nonprofit organizations and educational institutions; and WHEREAS, The leading professional association for Texas CPAs, the TSCPA serves the public interest by advancing superior standards of professional ethics and practice and by advocating for accountancy before state and federal regulators and the general public; in addition, the society offers its members myriad opportunities for networking, education, and community service; and WHEREAS, For the past century, the Texas State Board of Public Accountancy and the Texas Society of Certified Public Accountants have faithfully served the accounting profession in Texas, and the outstanding contributions of each of these institutions are a testament to the dedicated efforts of their members, both past and present; now, therefore, be it RESOLVED, That the House of Representatives of the 84th Texas Legislature hereby commemorate the 100th anniversary of the Texas State Board of Public Accountancy and the Texas Society of Certified Public Accountants and extend to their officers and members sincere best wishes for continued success with their important work; and, be it further RESOLVED, That official copies of this resolution be prepared for the TSBPA and the TSCPA as an expression of high regard by the Texas House of Representatives. Otto Button Frullo Stephenson Sanford

Allen Alonzo Alvarado Anchia Anderson of Dallas Anderson of McLennan Ashby Aycock Bell Blanco Bohac Bonnen of Brazoria Bonnen of Galveston Burkett Burns Burrows Button Canales Capriglione Clardy Coleman Collier Cook Craddick Crownover Dale Darby Davis of Dallas Davis of Harris Deshotel Dukes Dutton Elkins Faircloth Fallon Farias Farney Farrar Fletcher Flynn Frank Frullo Galindo Geren Giddings Goldman Gonzales González Guerra

Guillen Gutierrez Harless Hernandez Herrero Howard Huberty Hughes Hunter Isaac Israel Johnson Kacal Keffer Keough King of Hemphill King of Parker King of Taylor King of Uvalde Klick Koop Krause Kuempel Landgraf Larson Laubenberg Leach Longoria Lozano Lucio III Márquez Martinez Martinez Fischer McClendon Menéndez Metcalf Meyer Miles Miller of Comal Miller of Fort Bend Moody Morrison Muñoz, Jr. Murphy Murr Naishtat Nevárez Oliveira Otto

Paddie Parker Paul Peña Phelan Phillips Pickett Price Raney Raymond Reynolds Riddle Rinaldi Rodriguez of Bexar Rodriguez of Travis Romero, Jr. Rose Sanford Schaefer Schofield Shaheen Sheets Sheffield Simmons Simpson Smith Smithee Spitzer Springer Stephenson Stickland Straus Thompson of Brazoria Thompson of Harris Tinderholt Turner of Collin Turner of Harris Turner of Tarrant VanDeaver Villalba Vo Walle White of Bell White of Tyler Workman Wray Wu Zedler Zerwas

______________________________ Speaker of the House - Straus I certify that H.R. No. 183 was adopted by the House on January 27, 2015, by a non-record vote. ______________________________ Chief Clerk of the House Today’sCPA

Figure 2: Senate Resolution 18 WHEREAS, The professional practice of certified public accounting in Texas is celebrating its 100th anniversary in 2015; and WHEREAS, In 1915, the Texas Legislature passed the Accountancy Bill, which created the Texas State Board of Public Accountancy to oversee and regulate the examination and certification of accountants in the state; that same year, the Texas Society of Certified Public Accountants was established; and WHEREAS, The Texas State Board of Public Accountancy has since its inception helped ensure that the people of Texas are served by licensed men and women who possess the necessary education, skills, and capabilities to perform the vital function of accounting; and WHEREAS, The Texas Society of Certified Public Accountants is committed to serving the public interest with programs that advance the highest standards of ethics and practices within this honored profession; the societyâ&#x20AC;&#x2122;s more than 26,000 members work in a wide range of settings, from public accounting firms and private businesses to government agencies, educational institutions, and nonprofit organizations; and WHEREAS, For the last century, the Texas State Board of Public Accountancy and the Texas Society of Certified Public Accountants have served the accounting profession and the people of Texas with distinction; it is truly fitting that they receive special recognition for their many contributions to the public good; now, therefore, be it RESOLVED, That the Senate of the State of Texas, 84th Legislature, hereby commend the men and women who serve as certified public accountants on their exceptional contributions to the people of Texas and extend to them best wishes for a memorable 100th anniversary of their profession in Texas; and, be it further RESOLVED, That a copy of this Resolution be prepared in honor of this special occasion. Perry ________________________________ President of the Senate I hereby certify that the above Resolution was adopted by the Senate on January 27, 2015. ________________________________ Secretary of the Senate ________________________________ Member, Texas Senate Todayâ&#x20AC;&#x2122;sCPA March/April 2015

TAKE NOTE

TSCPA Midyear Board of Directors Meeting

M legislators.

By Rhonda Ledbetter, Chapter Relations Representative embers of the TSCPA Board of Directors met in Austin January 2728 to conduct Society business, obtain profession information and meet with

Chairman’s Report Chairman Mark Lee, CPA-Houston, reminded members of the importance of being a part of something bigger than yourself. He said: “We are better together. We can do more together. And what we do together is big!” Lee commended the efforts of so many to ensure that TSCPA continues to thrive and serve CPAs in Texas. He expressed that he was impressed by individuals’ commitment and overwhelmed by the collective energy coming from the 20 chapters. In briefly summarizing progress on the organization’s work to serve CPAs, he noted that: • membership has grown 2 percent from last year at this time; • the Society continues to maintain a high member retention rate of 93 percent; • the CPE Foundation continues to work with members and vendors to provide quality content in a variety of formats to meet members’ needs; • the Foundation has partnered with several chapters to enhance education opportunities for members; • TSCPA’s 100-Year Anniversary Task Force has met several times to plan the upcoming year’s celebration; • a history book is in the process of being written; • the 2015 legislative agenda has been developed and is being implemented; • the CPA-PAC had a successful year; • a new TSCPA website is in the works and will be completed in the upcoming year; • committees are hard at work to meet their assigned tasks in the new strategic plan; • the Federal Tax Policy and Professional Standards committees continue to represent Texas at the national level; and • the Young and Emerging Professionals Committee is an excellent resource as TSCPA explores future services and benefits for our newest members. Look for a comprehensive report in the “Year in Review” article in the May/June issue of Today’s CPA magazine.

Washington Update American Institute of CPAs Senior Vice President for Congressional and Political Affairs Mark Peterson overviewed 20

a number of issues that AICPA will be working on for the profession in the new Congress. New faces mean new relationships to foster. Peterson said that there are 61 new members of the House and a dozen in the Senate. AICPA makes it a priority to get to know new congressmen, as well as their staff, and let them know the profession stands ready as a resource. CPA grassroots involvement in educating elected officials is extremely important, especially in the current environment where the majority of those in the House and Senate have been in office fewer than five years. Two committees whose work affects the CPA profession are Senate Banking and House Financial Services. Some of the issues that AICPA expects them to address are: • Dodd-Frank reform; • “too big to fail” reform; • regulatory relief (including a cost/benefit analysis of new rules); • GSE reform; and • oversight of the Securities and Exchange Commission, Public Company Accounting Oversight Board and Financial Accounting Standards Board. Tax reform legislation is an important issue. Currently, individuals, pass-through entities, personal service C corporations, farming businesses, and all companies with annual receipts of less than $5 million are generally entitled to use the cash basis of accounting method for tax purposes. There is a proposal that would require many of these businesses to switch to the accrual basis. AICPA has worked hard with state CPA societies and a coalition of other groups to educate members of Congress about the negative impact of limiting the cash basis of accounting. The letters CPAs have sent to their senators and representatives have made a difference. Peterson stated that 46 senators and 233 representatives oppose cash limitation. Work will continue, with multiple advocacy approaches. Peterson also addressed the IRS Voluntary Annual Filing Season Program. AICPA’s focus is on a program that increases the competence of paid tax preparers, but doesn’t confuse the marketplace by implying that they are like CPAs. A continuing issue is mobile workforce legislation related to state personal income tax treatment of nonresidents. Key Congressional supporters look to address legislation in 2015; there is more bipartisan support than ever before. A bill in the 113th Congress got caught up in a scheduling logjam with controversial state tax bills. A growing concern is Equal Employment Opportunity Commission (EEOC) investigations that threaten traditional Today’sCPA

Figure 1. TSCPA Leaders for 2015-16 Terms begin June 1, 2015 Chairman-elect: (Chairman in 2016-17) Kathy Kapka (East Texas) Treasurer-elect: (Treasurer in 2016-17) Jesse Dominguez (Austin) Secretary: (Beginning June 2015 and expiring May 2016) Mitch Perry (Dallas)

Thomas Trevino, assistant in Sen. Garcia’s office; Pat Durio, CPA-Houston; State Sen. Sylvia Garcia; TSCPA Chairman Mark Lee, CPA-Houston; and Jonathan Cluck of the Texas State Board of Public Accountancy

Executive Board (Three-Year Term): (Beginning June 2015 and expiring May 2018) Edie Cogdell (San Antonio) Ryan Bartholomee (Permian Basin) Director-at-Large (Three-Year Term): (Beginning June 2015 and expiring May 2018) Belen Briones (El Paso) James Lucas (Houston) Michael L. Brown (Central Texas) Lisa Ong (Dallas) Rusty Chimeno (Southeast Texas) Rodney Overman (East Texas) Amanda Johnson (Fort Worth) Keith Reeger (South Plains) Jan Keeling (Austin) Jeannette Smith (Rio Grande Valley) Lyn Kuciemba (Brazos Valley) Donna Tadlock (Central Texas)

Rep. Wayne Faircloth; Rep. Dennis Paul; Carol Warley, CPA-Houston; Rep. Angie Chen Button, CPA-Dallas

Committee on Nominations: (Beginning June 2015 and expiring May 2016) Connie Clark (Austin) Gail Neely (Houston) Carol Collinsworth (Rio Grande Valley) Royce Read (East Texas) Phil Davis (Permian Basin) Keith Reeger (South Plains) Mark Goldman (San Antonio) Teri Reinert (El Paso) Kelly Hein (Fort Worth) Ken Sibley (Dallas) As immediate past chairman of TSCPA, Mark Lee (Houston) will automatically serve as the Nominating Committee chair, and Keith Reeger (South Plains) was appointed as vice chair.

Mark Peterson, AICPA; Gary McIntosh, CPA-Austin; and TSCPA Executive Director/CEO John Sharbaugh, CAE

AICPA Council – Three-Year Term: (Beginning October 2015 and expiring October 2018) The following names will be submitted to the AICPA Nominating Committee as recommendations from Texas to serve on the AICPA Council: Mark Lee (Houston) Jim Oliver (San Antonio) Bill Reeb (Austin) AICPA Council – One-Year Designee: (Beginning October 2015 and expiring October 2016) Allyson Baumeister (Fort Worth) Chairman-elect Appointees: Ratified by vote of the Board of Directors at this meeting

Kathy Ploch, CPA-Houston, and John Baines, CPA-Dallas Today’sCPA March/April 2015

Executive Board (One-year term – 2015-2016)

Johnny Baines (Dallas) Stephen Parker (Houston) Ben Simiskey (Houston)

Committee on Nominations

Lei Testa (Fort Worth) continued on next page 21

TAKE NOTE continued from previous page public accounting firm partnerships. The EEOC contends that partners might be employees instead of owners and questions whether partner mandatory retirement is age discrimination. A Senate report questions EEOC activity. AICPA will continue to address the issue.

Texas 84th Legislature Members visited the state Capitol to meet with legislators and staff. Many were in the respective chamber galleries for the reading of House and Senate resolutions recognizing the 100th anniversary of the CPA profession in Texas. For more information, see the Capitol Interest article in this publication. Other Business The Treasurer’s report was made by Jim Oliver, CPA-San Antonio. Motions were passed to increase dues for non-retired CPA members by $10 and to charge $90 for those who achieve Lifetime Member status after May 31, 2015. (Members in the Lifetime category by or before that date will continue to pay no dues.) Standards for formation of a new chapter were approved. The Annual Meeting of the Accounting Education Foundation was conducted and trustees with terms beginning June 2015 were elected. The results of TSCPA’s electronic election were announced. Also, there was a vote to ratify the chairman-elect’s appointees. (See Figure 1.) A report on the CPA-PAC was given. Fundraising awards were presented to chapters. (See Figure 2.) Upcoming Events The 2015 Annual Meeting of Members will kick off the year’s celebration of TSCPA’s 100th anniversary and will be held in Dallas at the Westin Galleria June 26-27. The Doubletree El Paso Downtown is the site for the next Midyear Board of Directors Meeting, Jan. 29-30, 2016. n

Figure 2 CPA-PAC Awards The following awards were presented to chapters for their work encouraging members to donate to the CPA-PAC. Highest Percentage of Fund-Raising Goal Large Chapter – Fort Worth Medium-sized Chapter – South Plains Small Chapter – Brazos Valley Highest Percent Increase in Members Contributing Large Chapter – Houston Medium-sized Chapter – South Plains Small Chapter – Abilene 22

What’s New On the TSCPA Website Go to tscpa.org to learn more about … New posts on Governmental Affairs blog and Federal Tax Policy blog. TSCPA’s blogs are available to keep you updated during tax season and the Texas legislative session in Austin. For tax season updates, go to http://tscpafederal.typepad.com/blog. For updates on the legislative session, go to http://tscpaatthecapitol.com. New videos – In the TSCPA Advocacy for CPAs Video, members discuss TSCPA’s important advocacy efforts on behalf of the accounting profession. The 2015 CPA-PAC Video provides information about the CPA-PAC, TSCPA’s member-managed, member-driven and member-focused political action committee. You can view both of them from the CPA-PAC website. Go to www.txcpapac.org and click on the video. n

Accountants Confidential Assistance Network Seeks Volunteers The Accountants Confidential Assistance Network (ACAN) program befriends a number of CPA candidates around the state as part of the ACAN peer assistance program that helps Texas CPAs, CPA candidates and/or accounting students who are dealing with alcohol, chemical dependency and/or mental health issues. Can you help? Please contact Craig Nauta at 800-428-0272, ext. 238; 972-687-8538 in Dallas; or at cnauta@tscpa.net. On behalf of John B: this is a 12th man doing a 12th step. n Today’sCPA

TSCPA Awards Nominations Due April 30

2014 Outstanding Educator Award Recipients Recognized TSCPA presented four top Texas accounting professors with the organization’s 2014 Outstanding Accounting Educator Award. The award ceremony for this honor was held during TSCPA’s Accounting Education Conference. The awards recognize accounting educators in Texas who have demonstrated teaching excellence and have distinguished themselves through active service to the profession.

Now is the time to nominate your fellow members for a TSCPA award. If you know a young CPA who deserves recognition, someone who is working to promote the accounting profession, or someone who is making a difference in your chapter or local community, be sure to send TSCPA your nomination. 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. All criteria details are available online. For more information, go to TSCPA’s website at www.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. Nominations are due April 30. n

Congratulations to the recipients: • Cathy Scott, CPA – Navarro College • Narita Holmes, CPA – The University of Texas of the Permian Basin • Kelly Noe, Ph.D., CPA – Stephen F. Austin State University • Brian Lendecky, CPA – University of Texas at Austin For more information about the Outstanding Accounting Educator Award, please go to TSCPA’s website at tscpa.org and click on Students – Educators – Outstanding Accounting Educator Award. n

FASB and PCC to Host Private Company Town Hall at SMU

The Financial Accounting Standards Board (FASB) and the Private Company Council (PCC) will host their fourth Private Company Town Hall Meeting on April 28 at Southern Methodist University in Dallas. The town hall meeting will take place from 8:30 a.m. to noon (CDT) in the Crum Auditorium in the Collins Executive Education Center. TSCPA members can receive three CPE hours for attending. The town hall meetings are intended to provide private company stakeholders across a wide variety of industries the opportunity to discuss private company accounting issues and share input on current and future agenda topics of both FASB and the PCC. PCC Chairman Billy Atkinson, CPA-Houston, will lead the discussion. Other expected participants are FASB members Daryl E. Buck and Marc A. Siegel, and PCC members Thomas Groskopf, Mark Ellis and Carleton Olmanson. Those who would like to attend should register in advance. For more information, visit the FASB website at www.fasb.org and search on town hall. n Today’sCPA March/April 2015

Free Financial Literacy Resources on ValueYourMoney.org TSCPA offers free personal finance resources for the workplace. The information is available for download on the Society’s financial literacy website, ValueYourMoney.org, and can be shared with your employer, employees and colleagues. Topics include buying a home, setting and keeping a budget, establishing good credit, protecting your identity, teaching kids about money, and more. You can access the material in a variety of sources, including articles for newsletters/intranets, table tents for the break room, flyers for bulletin boards and paycheck inserts. Go to the Workplace Financial Education area of the site at ValueYourMoney.org to read and download the information. n

Management Accountants: Stand Out with the CGMA Designation The Chartered Global Management Accountant (CGMA) designation was created by AICPA and the Chartered Institute of Management Accountants (CIMA) for CPAs who work in business, industry and government. Adding the CGMA designation to your CPA can help you adapt to the volatility of the market and the changing employment landscape. You’ll be poised to take advantage of opportunities to act when the time is right. Beginning in January 2015, all candidates are now required to pass an exam in management accounting to obtain this global designation. The exam is an integrated, comprehensive strategic case study applying knowledge to real-world scenarios. The first exam sitting will be in May 2015. To learn more about the designation and the exam requirement, visit the website at cgma.org. n 23

COVER ARTICLE

Time-Driven Activity-Based Costing: A Powerful Cost Model

By Richard J. Barndt, Peter F. Oehlers and Glenn S. Soltis

ontemporary business, whether large or small, requires that management have a clear understanding of its costs and a scalable, easy-tounderstand cost model that can quickly reflect changes in business as they occur. While original activity-based costing (OABC) provided a solid model for costing varied products and services, time-driven activity-based costing (TDABC) can capture more variation and complexity, providing the same highquality information without many of the drawbacks associated with OABC models. Todayâ&#x20AC;&#x2122;s customer focus finds business producing and stocking a greater variety of products, supporting more order-entry and order-tracking channels, producing and delivering in smaller order quantities, delivering to customer end-use locations, and providing various levels of technical support. Along with these increased levels of customer service is the need to manage customer and channel profitability. OABC called attention to cost differences between 24

high and low volume, simple and complex, standard and custom products. TDABC can provide quality information on customer and channel profitability by reflecting the cost differences between low-demand, simple-to-service customers and high-demand, complex customers.

Original ABC OABC focused on the causes of cost in response to the diversity of product types, markets and customers, resulting in greater tracing of indirect costs to various cost objects. Diverse product features, varying quantities, shorter product life cycles and the need for fast production turnaround suggested that a costing model allocating indirect costs on a unit-level denominator activity would not be reflective of product costs. The normal model would likely overcost large quantity, easy-to-make products and under-cost small quantity, more difficult-to-make products. The OABC model changed the face of tracing indirect costs to products. Valuing the Todayâ&#x20AC;&#x2122;sCPA

activities performed and assigning them to products and services based on their consumption of the activities resulted in a product cost more reflective of the economic reality of how resources were consumed.

Issues with OABC Although OABC delivered improved costing, it had significant implementation issues. First, many models identified large numbers of activities necessary to capture the complexity of a process. The challenge was recognizing when enough activities had been identified to adequately describe a process. Second, the assignment of departmental costs to individual activities was generally based on the results of employee interviews and surveys that asked them to estimate the time, in percentage terms, they spent on the various activities over the past year. Asking employees to accurately remember how they spent their time over the last year left the allocation results subject to challenge. Additionally, employees would likely account for 100 percent of their time being spent in assigned activities, suggesting no idle or unproductive time. Accordingly, the cost assignments were based on full capacity and the cost of idle time was included in the cost of the various activities. The result was a theoretically flawed model. Finally, products and services offered, customers and activities changed over time. The time-consuming and expensive employee survey process needed to be repeated any time significant processes and activities changed if the model was to be reflective of current business reality. Time-Driven Activity-Based Costing TDABC is a simpler model – easily installed, validated, maintained and expanded – making it a perfect cost model for today’s fast-paced business environment. It requires the determination of two parameters: the unit cost of supplying capacity and the time required to perform an activity. Determining Departmental Costs. TDABC does not assign resource costs to cost pools on the basis of employee survey results. Rather, costs can be accumulated at the department level as a first step in determining the unit cost of capacity. Departmental costs should include the cost of all resources consumed by each department, including: • employee salaries and fringe benefits; • supervision salaries and benefits; • indirect labor salaries, fringe benefits and the cost of any supervision; • depreciation on equipment and technology used by employees and supervisors; • employee and supervisor occupancy costs; and • other costs from company support functions. It is common for management to allocate support or shared services costs to operating units using a direct, stepped or reciprocal model based on such allocation bases as square feet, headcount or machine hours. Although these approaches seem simple and easy to apply, they are unlikely to reflect how the shared services Today’sCPA March/April 2015

resources are actually consumed. Consideration should be given to extending the same TDABC analysis to shared services. Similarly, consideration should also be given to organization sustaining expenses. These costs evidence little relationship to volume or mix and are difficult to causally trace to operating units. As would be the case in an OABC model, these costs may be best handled as period costs and left out of the model. The goal is a simple accurate costing model for determining the resource cost of producing products and services. The use of an arbitrary allocation base for support costs would seem to detract from that goal. The actual general ledger data should be used to validate the initial model verifying the arithmetic and accuracy of the time equations. Additionally, the use of general ledger data agreeing to financial statements will go a long way in achieving buy-in from management. The model time equations can be used to calculate various product, customer and department costs that can be reconciled to the general ledger validating the model. The use of actual general ledger data does present some problems. The use of actual costs will reflect any unusual or nonrecurring transactions. Seasonality, timing issues and cost variances are also reflected in the numbers, potentially causing distortions in monthly or interim model iterations. The use of budgeted or forecasted resource spending should be considered to alleviate these issues after the initial validation. Determining Practical Capacity. The next step in determining the unit cost of capacity supplied is to determine the capacity of each department. TDABC uses time to drive cost since personnel and equipment have capacity easily expressed in terms of time. Capacity is measured by the quantity of time – in hours, minutes or seconds – that employees are available to perform work activities. Capacity might be better measured by available machine time in a department that is equipment paced. Each department’s capacity would be estimated as its number of employees multiplied by the time each employee is available for work each day. Employee available time per-day should be adjusted for such things as meals, breaks, training time or maintenance times in arriving at a department’s practical capacity. Depending upon whether the rate being determined is a quarterly or annual rate, the daily capacity would be multiplied by the appropriate number of available-forwork days. A capacity cost rate can then be calculated as: Capacity Cost Rate =

Cost of Capacity Supplied (Departmental Costs) Practical Capacity

Identifying the Activities. Identifying the activities being done in each department is the next step. Observation and employee inquiry are used both to identify and confirm processes. The activity dictionary prepared as part of an OABC implementation or existing process maps will be useful in identifying the processes. An additional source of this information may be flow charts and narratives prepared for internal control and Sarbanes-Oxley compliance. continued on next page 25

COVER ARTICLE continued from previous page TDABC replaces the employee survey process of OABC with estimates of the time or capacity required to perform an activity and expresses it in terms of an equation. The equation would contain any base time required to process a transaction plus a time required for each variation in the activity that could be encountered. Precision is not a requirement here; an accurate expression is more the goal. Generally, equations are built by beginning with a transaction’s principal factor and then adding the variables. A good approach is to begin with the most costly processes. Once the processes are defined, the significant variables or drivers that consume time can be identified. Initially, it might be easiest to use driver data already being collected rather than developing and expanding data collection facilities. Mix and volume changes have no effect on equations. A general form of the time equation is as follows:

Time Required for Activity =

Minutes (Base Activity) + Minutes X # Variable 1 + Minutes X # Variable 2 + Minutes X # Variable i

Transaction base times and times required to accomplish each variable can be determined several ways depending upon resource availability. Available industrial engineering data (results of time and motion studies) can provide the information. Employee inquiry and observing the processing of transactions and recording the time taken can establish time requirements and confirm any employee supplied data. A better approach might be to observe and time a number of similar transactions and calculate an average time. The components of the model are now complete; what remains is to run it with data. Although TDABC may not be quite as data demanding as OABC, it does require transactional data on products, customers, orders and other intended cost objects for a company to enjoy its benefits. Companies with enterprise resource planning systems in place will already have access to the granular level of data necessary to feed a TDABC model. Others will find it necessary to invest in the required technology to capture and provide access to the required data. The use of a pilot or small-scale implementation will provide companies with the ability to “test drive” the TDABC model before companywide implementation, thereby relieving some of the pressure on data. Driving initial formulas on data already in existence from legacy, homegrown or electronic spreadsheet packages may also provide some relief, though possibly resulting in a less accurate model output. The beauty of the TDABC model can be seen in its ease of update. Changes in departmental costs or in available capacity are easily handled with adjustments to either the numerator or denominator and calculation of a new capacity cost rate. Time equations can easily be updated for improvements in times required to complete activities or for the addition of new variables to an activity reflecting increased levels of complexity. The addition of a completely new activity to a department requires only an estimate 26

of the times required for the tasks and the structuring of a new equation.

A TDABC Example Customer Direct Inc. has its own call center selling and supporting its warehouse inventory and distribution direct to the products’ end user. Although we have chosen to example a sales/ distribution type of organization, the principles of TDABC are easily applied to manufacturers and other types of businesses. The costs associated with the purchasing, warehouse, shipping and customer service departments include direct wages and benefits, occupancy, technology and other support costs. All employees work a five-day week and are paid for eight hours each day. Additionally, they are given 30 minutes for lunch, two breaks totaling 30 minutes, and spend 30 minutes in training each day, resulting in six-and-a-half hours (390 minutes per day) available for assigned activities. Capacity is expressed in terms of minutes, as we believe they are more easily understood than fractional amounts of an hour. Allowing for each employee receiving 10 days vacation and six paid holidays per year, each employee is available for work 244 days per year. Departmental costs, the number of employees, practical capacities in minutes and the capacity cost rates per minute are presented in Table 1.

Table 1 Department

Cost

# Employees

Minutes

$ / Minute

Purchasing

$525,000

475,800

$1.10

Warehouse

520,000

951,600

.55

Shipping

300,000

570,960

.53

Customer Service

1,800,000 25

2,379,000

.76

Table 2 Purchase order processing time = 10 (prepare the basic PO) +15 (if contact vendor) +5 times the # of line items Order entry time = 5 (enter customer header information) +2 (if a new customer) +2 times the # of line items +10 (if an international customer) +2 (if special handling required) +5 (contact production/warehouse) Pick/pack order time = 3 (prepare/print pick-pack) +4 times the # of line items +1 times the # of line items w/special packing +3 times the # of cartons Order shipping time = 8 (prepare basic docs) +5 times the # of cartons +10 (if international shipment) +5 (if “rush” order) Today’sCPA

Direct observation and discussions with employees identified the key activities and variables in each department. Processing a purchase order, for example, requires 10 minutes to prepare the basic purchase order information (required for all purchase orders) plus 15 minutes if the purchasing agent is required to contact the vendor, plus five minutes for each line item ordered. The time equations for placing a purchase order and three other activities are presented in Table 2. With the capacity cost rates and formulas established, the model is ready for use. Operating results for the purchasing department for the first month reveals that they processed 400 purchase orders representing 5,600 line items and initiated 85 vendor contacts. Applying the equation for placing a purchase order, the capacity consumed and the total cost of the months purchasing transactions are presented in Table 3. Note that the use of practical capacity enables quantification of any excess capacity for the month, in this case 5,725 minutes and $6,297.50. Knowing which processes have excess or shortages of capacity enables management to choose whether to redeploy resource capacity to other processes or use excess capacity for other activities. Either way, the result is a more efficient use of resources. Continuing our example, transactional data collected for the month for two customers, A and B, are presented in Table 4. Again, making use of the equations and capacity cost rates, the estimated costs associated with servicing these very different customers are presented as Table 5. The costs associated with handling customers A and B are $789.18 and $974.91, respectively. The data could be easily extended to reflect customer profitability by including the sales of customers A and B and their respective sales discount structure, product costs and resulting product margins. The mix of products purchased by A and B is the other key factor in determining account profitability. The challenge

Table 3 # of Transactions

Minutes / Transaction

Total Minutes

Cost @ $1.10 per Minute

Purchase orders

400

4,000

$4,400.00

Line items

5,600

28,000

30,800.00

Vendor contacts

1,275

1,402.50

33,275

36,602.50

39,000

42,900.00

5,725

$6,297.50

Capacity used Capacity available

(475,800 / 244 X 20 days)

Excess capacity

Table 4 Customer A # of orders placed # of line items

Customer B

200

# orders requiring special handling

# of warehouse contacts

# of cartons

# of items requiring special packing

# of orders requiring “rush” handling

for management is to utilize the knowledge gained from the TDABC model results to identify ways of managing each customer and improving each customer’s profitability. This example could have been modified to include a storage process, thereby reflecting the difference in resources consumed by products stocked in large versus small lots and products that move more slowly than others. Rather than attaching these costs to stocking or order picking, the costs of warehouse space continued on next page

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COVER ARTICLE continued from previous page Table 5 Variables

Customer A

Customer B

2 x 5 min x $.76 = $7.60

12 x 5 min x $.76 = $45.60

Order entry Customer header Line items

200 x 2 min x $.76 = 304.00 200 x 2 min x $.76 = 304.00

Special handling

4 x 2 min x $.76 = 6.08

Warehouse contact

10 x 5 min x $.76 = 38.00

2 x 3 min x $.55 = 3.30

12 x 3 min x $.55 = 19.80

Pick/Pack Prepare/print Line items Special packing

200 x 4 min x $.55 = 440.00 200 x 4 min x $.55 = 440.00 -

20 x 1 min x $.55 = 11.00

6 x 3 min x $.55 = 9.90

12 x 3 min x $.55 = 19.80

Basic docs

2 x 8 min x $.53 = 8.48

12 x 8 min x $.53 = 50.88

Cartons

6 x 5 min x $.53 = 15.90

12 x 5 min x $.53 = 31.80

3 x 5 min x $.53 = 7.95

$ 789.18

$ 974.91

Cartons Order shipping

Rush orders Total Cost

could attach to storage. The equation for storage might be driven by cubic yards or feet of available space, rather than time. It should be noted here that you could encounter a resource capacity better measured by some unit other than

time. That causes no problem, as the basic model generalizes to other capacities easily. The cost of capacity, in this case a cost per cubic yard or foot per day, would be calculated with a numerator of annual building or space cost divided by 365, the number of days in a year and a denominator of the total available space in cubic yards or feet. This rate would enable occupancy costs to be assigned to products reflecting their use of space as a function of inventory quantity and turnover.

Implementation As would be the case in any change of this type, obtaining management’s buy-in to the model as early as possible is critical. Successful implementation of any change without the buy-in of stakeholders is doomed. The authors believe that validating the first iterations of the model with the actual general ledger numbers, as previously discussed, goes a long way in achieving the goal. Briefly, a plan for a TDABC implementation might look as follows. Phase I – Preparation: • Establish the implementation team. • Establish the objectives for the model. (Why do we need it?) • Establish the scope of the project. (Consider doing a pilot model to obtain clear vision of the benefits, costs and obstacles on a small scale.)

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Phase II – Data Definition: • Analyze and gather the data to drive the initial model. • Identify the relevant activities by department or other center. • Estimate time equations and capacity cost rates. • Determine the key processes and activity steps. Phase III – The Pilot Model: Establish links from data to model. Drive general ledger data to departments. Load time equations for pilot processes. Load the transaction data. Calculate costs or profitability (as determined by objectives and scope). • Validate the model. • • • • •

The results from the first three phases will determine the extent of the final phase or rollout. Depending on the company, and given satisfactory results, the pilot model can serve as a template that can be propagated to other similar operating units perhaps with some minor modifications. For companies with more diverse product offerings and processes, unlike those of the pilot model, the experiences of the pilot team can be leveraged by functioning as the consulting group that advises other operating units as they develop their TDABC models during rollout.

CPAs Are Ideal for Development and Implementation Accounting professionals play a key role in developing and implementing the TDABC model. Their broad-based understanding of business makes them excellent implementation team leaders and adds value to the processes of developing departmental cost rates and the activity time equations. CPAs can also play a key role in driving the TDABC model forward as a planning and forecasting tool. n

References Kaplan, R. S. & Anderson, S. R. (2007). Time-driven activity-based costing: a simpler and more powerful path to higher profits. Boston: Harvard Business School Press.

Richard J. Barndt

is assistant professor of accounting at West Chester University of Pennsylvania. He can be contacted at RBarndt@wcupa.edu.

Peter F. Oehlers

is associate professor of accounting at West Chester University of Pennsylvania.

Glenn S. Soltis

is instructor of accounting at West Chester University of Pennsylvania.

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FEATURE

Designing a Procurement Function Mitigate Financial, Operations and Fraud Risks While Increasing Profitability and Efficiency

By Mike Stein, CPA, CIA

enior business managers in Texas want to preserve margins and retain cost-cutting measures. That emphasis is understandable as businesses continue to rebound from the country’s recent economic downturn. That emphasis, though, may adversely affect their views of the procurement function. Procurement may be viewed as an ancillary back-office function that increases general and administrative expenses. A formal procurement function, though, actually mitigates the operational, fraud and financial reporting risks that could negatively affect a company’s bottom line and its reputation. Senior leaders or operations managers may be making material and immaterial purchasing decisions in a company that lacks a formalized procurement function. That distracts those individuals from focusing on generating additional revenues, increasing efficiencies and reducing costs. Those individuals typically draw higher salaries, too. That means the company would be paying more than it should for executing procurement processes. An informal procurement function may create instances where quality and specifications for raw materials or equipment vary from one purchase to another. Those variances lead to difficulties adhering to production schedules. Without a formal, centralized procurement function, individuals throughout the company do not know if someone else already acquired goods or services they just ordered. Such duplicate purchases increase inventory carrying costs. Some vendors have poor industry reputations, unreliable delivery histories, or provide goods or services of questionable quality. Perceived product quality and value declines if the company buys from those vendors. Ultimately, the company’s reputation suffers. Without a formal process for negotiating purchasing agreements, a company may not receive favorable 30

terms (e.g., payment discounts). That negatively impacts the company’s float or cash flow. Informal procurement practices lacking defined segregations of duties may also cause cash flow difficulties. In such instances, certain individuals can make material purchasing decisions and obligate company funds without attaining proper approval. This practice may not allow the company to deploy its capital to the highest and best use. For example, cash tied up in the purchase of unnecessary goods or services may not be used to take advantage of purchase discounts or short-term interest rates. In companies with information procurement functions, the factors constituting “best value” need to be defined. Without such definition, purchases may be based solely on cost, convenience or location without considering what is best for the company as a whole. For instance, using prices as the sole basis in a purchasing decision may result in the acquisition of poor quality materials or result in untimely delivery. As a result, the company may lose customers and gain a poor reputation. So many opportunities for fraud also arise amid informal procurement functions. Transactions between related parties may go unnoticed and unevaluated for appropriateness. Fictitious vendors may be created to divert funds. Employees may receive kickbacks for directing business toward a particular vendor even though that vendor may not provide the goods and services considered to be the best value for the company. Without a formal procurement function, such improper activities may go undetected for considerable spans of time. Companies vary in the particular risks they face. They vary in the controls they have to mitigate those vulnerabilities or to take advantage of potential opportunities. A formalized procurement function that includes policies and procedures mitigates operational, financial and fraud risks while enhancing the bottom line Today’sCPA

Establishing a Formalized Procurement Function Companies differ in resources, staffing levels and other factors, so there is no “one size fits all” design for a procurement function. For a smaller company, the procurement function may start with a lone purchasing agent, with more staff members added as business growth needs dictate. Regardless of the procurement function’s size, its procurement policies and procedures should ensure the company is attaining the best value, utilizing high-level personnel to their highest and best use, and establishing internal controls to mitigate risks of fraud or errors in financial reporting. Senior management must define the procurement function’s responsibilities and authority to incorporate appropriate levels of accountability. Once the objectives and responsibilities of the procurement function are defined, senior management should communicate the role of the procurement function throughout the organization. Any questions and concerns that arise then should be addressed. That communication prompts individuals and other departments to embrace the procurement function. The procurement function’s first priority should be developing detailed policies and procedures relating to the following activities: • vendor evaluation, selection and monitoring, including vendor master file review; • bid solicitation, evaluation and selection; • purchasing authority levels and purchase order requirements; • verification of receipt for goods and performance of services; and • reviewing the vendor master file records for fictitious, duplicate or dormant vendors. Vendor Evaluation, Selection and Monitoring The vendor evaluation process should verify the vendor: • actually exists; • can produce the goods at the specified quantity or perform the requested services; • enjoys a good industry reputation; • meets the company’s ethical standards; and • does not have any going concern considerations. Due diligence procedures for a particular vendor should align with the anticipated volume or significance of the purchase. That alleviates unnecessary delays and assures proper allocation of company resources. Potential due diligence tasks include: • facility or site visits; • reference contacts; • reviews of available financial information; and • background checks. Following vendor evaluation and approval, the procurement function needs to decide whether a master service agreement (MSA) should be negotiated and executed. The MSA documents contractual terms reached with vendors that provide substantial amounts of materials or services. Such agreements typically pertain to one large purchase or recurring procurement activities involving the same product, service or vendor. Items addressed Today’sCPA March/April 2015

in the MSA may include payment terms, bulk discount rates, warranties, delivery terms, service response times or other items of importance to the company. The MSA provides clarity and reduces the potential for disputes or unmet expectations to arise between a purchaser and vendor. MSAs also eliminate the need to draft lengthy, detailed contractual terms for each recurring purchase. In addition, MSA agreements provide greater uniformity and efficiency for procurement activities. Periodic analysis of MSA transactions should address the vendor’s adherence to the agreement’s terms and conditions. Perhaps changing facts or circumstances affect the vendor’s ability to meet specified MSA terms and conditions. The MSA may need to be rewritten to address such changes. MSA analysis also identifies factors that could affect the production process or the company’s reputation. Such analysis illustrates instances where a company may choose not to retain a current vendor.

Bid Solicitation, Evaluation and Selection A formalized bidding process establishes procurement thresholds and requirements. That allows for the efficient procurement of goods and services that meet the company’s needs, and it assures appropriate due diligence is performed for the type of goods or services being acquired. A formalized bidding process also assures that related party transactions meet arms-length standards and that the company receives best value for its capital. A formal bidding policy for a particular company might dictate that no bids are necessary for purchases of less than $10,000, whereas the purchases of goods or services with prices ranging between $10,000 and $25,000 would require at least three informal cost inquiries. Required information for those inquiries might include the vendor names, price quotes and various conditions. The purchaser might also be required to use a vendor covered by a company MSA. A purchase between $25,000 and $50,000 might require three formally documented quotes from requested vendors. A purchase in excess of $50,000 might require use of a detailed, formal request for a quote (RFQ) package. The bid policy should include guidance on how the bids or RFQs received should be evaluated and documented. The policy should not be so restrictive that it requires the lowest bid or use of an existing or a previous vendor. The policy needs to focus on selecting a vendor whose products and services constitute the best value for the company. The rationale for selecting a bid that is not the lowest cost alternative needs to be documented. A company, for example, may need to purchase widgets. A particular vendor may sell those widgets at a lower cost than any other vendors. That particular vendor, though, may have a smaller facility that is running at capacity. That particular vendor might require payments upfront or have a spotted delivery history. Therefore, a different vendor charging a higher per-unit price may be deemed to provide the best value, because that vendor continued on next page 31

FEATURE continued from previous page

has greater production capacity and does not require upfront payments. That additional capacity reduces the likelihood of production down time or late deliveries. Not having to pay up front also benefits the companyâ&#x20AC;&#x2122;s cash flow situation. That reasoning would be documented.

Purchasing Authority Levels and Purchase Order Requirements The procurement function should establish thresholds for the review and approval of purchases. Such thresholds determine what procurements require purchase orders and what routes of approval must be followed for various types of purchases. These policies ensure that all transactions are valid and that requested purchases receive the appropriate level of approval. Overall, such policies promote efficiency by aligning the review and documentation requirements to the significance of the purchase. Authority limits for purchase approvals should allow for small re-occurring purchases without lengthy approval processes. Conversely, large one-time purchases should require authorization by senior management. The delegation of purchasing authority may be tiered by position, department or individuals, or by single or aggregated purchase value. Some purchases may require dual forms of approval. Other purchases may have authority limits that fluctuate based on the individualâ&#x20AC;&#x2122;s area of expertise or division. For instance, the director of operations may have a $100,000 32

approval authority for equipment purchases or maintenance, but have a $15,000 limit for office expenses. The delegation of purchasing authority should be reviewed, at least annually, by executive leadership to evaluate whether defined authority levels remain appropriate. Purchase order policies should dictate thresholds and documentation required for various procurements. For instance, purchases ranging in cost from $5,000 to $25,000 might require a detailed purchase order, while single purchases exceeding $25,000 might require the MSA. Formalizing the approval and review processes reduces the amount of time senior management must commit to approving and reviewing purchases. Company leaders then have more time to focus on running the business. An efficient purchase order process with supporting documentation also helps accounting personnel more easily identify instances where purchases have been made for goods or services that have not yet been received. That enables the accounting staff to more accurately calculate accounts payable accrual at the end of a financial reporting period. In addition, purchase orders provide management with a means to verify the receipt of goods against what was ordered and expected.

Verifying and Reconciling Completed Purchases The procurement function should establish policies and procedures for verifying receipt of goods or services Todayâ&#x20AC;&#x2122;sCPA

performance prior to remitting payment. Those policies and procedures should include verification of the pricing and quantity of goods or services received. Such practices mitigate the risks that fictitious or erroneous transactions might be recorded and processed. Those practices also reduce the likelihood that the company will experience delays in production due to inadequate or incorrect material deliveries. An individual should be given responsibility for verifying that the quantity, item numbers and price per unit delivered match the purchase order. For a service performed, that might entail an inspection to verify the performed service met expectations and specifications. The receiving document should then be forwarded to the accounts payable department. That department would then match the receipt against the purchase order and the invoice for reconciliation purposes. If that three-way match proves satisfactory, payment would be authorized. The purchase order would also be closed so no other expenses could be attributed to that purchase order’s coding.

cost. If the company has policies requiring greater documentation for purchase requests exceeding $1,000, that unusually high number of $900 to $999.99 purchases could indicate someone is defrauding the company by claiming purchase sums not subject to a higher degree of scrutiny.

An Effective Procurement Function Reduces Risks, Promotes Efficiency and Sustains Growth A formalized procurement function mitigates operational, fraud and financial reporting risks while also promoting greater efficiencies and reducing costs. Standard procurement processes implemented throughout an organization eliminate the operational disparities and difficulties that arise when procurement activities are addressed Without a formal procurement function, informally. A purchasing department, led by a company may be spending more than procurement professionals, it should to secure various goods also enables company leaders and operational and services. managers to focus on core responsibilities. Without a formal procurement function, a company may be spending more than it should to secure various goods and services. That drives up its cost of sales and Reviewing the Vendor Master File Records places the company at substantial economic risk. Related party for Fictitious, Duplicate or Dormant Vendors transactions, kickbacks, establishment of fictitious vendors and Processes for periodically evaluating the vendor master file other improper activities may occur without effective oversight. should be developed and implemented by the procurement A formalized procurement function helps a company identify function. That assures that fictitious, duplicate or dormant such situations and other fraud risks. vendors are identified in a timely manner and removed from A formalized procurement function also addresses potential the system. The analysis should be comprehensive enough to financial reporting risks that include improper classifications ascertain whether there are any indications of anomalies in for various transactions and allocations of expenses to the wrong payment history. reporting period. An organization gains tangible cost savings The procurement function should perform an analysis of the through establishing and maintaining a formal procurement vendor master file in conjunction with the employee master file function. Competitive bidding, bulk discounts, MSAs and at least once a year. That comparison helps identify instances of other effective procurement practices reduce costs and help improper related party transactions. An unusual increase in total ensure that an organization receives the greatest value from the payments made to a particular vendor could also indicate kickbacks array of purchases it makes. or other improper activity. In addition, the transaction detail An organization gains a variety of efficiencies, too. Uniform should be analyzed using a Benford’s Law analysis to determine processes throughout the organization direct purchasing whether statistical anomalies exist in the payment history or in a decisions and compilation of necessary documentation. Various comparison of payment history to vendor master files. types of purchases can be prioritized so the most costly or most Analysis based on Benford’s Law reveals whether a particular crucial procurements receive the greatest amounts of scrutiny. number or digit appears more times than expected. That A formal procurement function provides those degrees helps a company identify potential instances of fraud. Such an of oversight and control. The function also continually analysis, for example, might reveal a disproportionate number delivers cost savings and operational efficiencies to sustain of purchase transactions ranging between $900 and $999.99 in organizational growth. n Mike Stein, CPA, CIA

is a senior manager in advisory services in the Houston office of Weaver, the largest independent accounting firm in the Southwest with offices throughout Texas. He can be reached at 832-320-3412 or Mike.Stein@Weaver.com.

Today’sCPA March/April 2015

FEATURE

An Accounting Soothsayer from the Early 1950s: Could He Accurately Predict the Future of Accounting?

Todayâ&#x20AC;&#x2122;sCPA

By Jeffrey Ritter, George Romeo and Larissa Kyj

he article “Accountancy: Circa 2000 A.D,” written in 1950, presented at the annual meeting of the American Accounting Association in 1953 and published in 1954 in The Accounting Review, articulated C. Aubrey Smith’s predications for the accounting profession in the year 2000 and detailed several advancements that could occur between the period of 1950 and 2000. His predictions focused on three main aspects of the profession: professional accounting organizations, auditing and education. After a brief biography of Smith, this article analyzes his predictions for the accounting profession of the 21st century to determine the accuracy of his ideas. C. Aubrey Smith, born in Arkansas but raised in Texas, had an outstanding career serving as a faculty member at The University of Texas for 42 years. Born in 1901, Smith would eventually achieve a position of prominence in the field of accounting that spanned decades. He began his career in 1924 at the University of Texas as “registrar and faculty member in then School of Business Administration” (Welsch et al., 2000). After only two years of service, he decided to pursue a career in public accounting to augment his knowledge and experience in a business setting. In 1927, Smith realized his passion was to educate rather than remain in the business environment. He was conferred a Ph.D. by Columbia University in 1933, and in the following years published various books and articles such as Fifty Years of Education for Business at The University of Texas (1962) and Sixty Years of Accounting Education on the Forty Acres (1972). His focus on accounting education throughout his career earned him the title of “college historian” (Welsch et al., 2000). Smith’s efforts to provide a superior accounting education through his open-door policy helped establish a top-ranked accounting program at the University of Texas. Smith went above and beyond for his students by mentoring them to ensure their success. Smith died in 1994 at age 93, but his legacy lives on through the creation of The C. Aubrey Smith Professorship in Accounting and the C. Aubrey Smith Educational Foundation.

Business Setting: 1950s and 2000s When Smith wrote his article in 1950, it was the beginning of the height of the accounting profession’s reputation and influence (Zeff, 2003). The demand for accountants began to increase dramatically during the 1950s as the number of stockholders grew from 7 million in 1952 to 17 million in 1962 (Dennis, 2000). As corporations grew in the postwar economy, there was a greater need for “more accountants to audit, track costs and advise their corporate clients” (Dennis, 2000). Computers were still in primitive form or nonexistent, so the firms of the 1950s required three or four people for every one today because of the flow of work and the time-consuming manual operations. Multiple individuals performed calculations by hand to ensure accuracy since firms lacked the ability to rely on a computer’s calculating abilities. In 1954, certified public accountants surpassed 50,000 (The Year 1954 in Review, 1955), and the demand for accountants continuously exceeded the supply. Smith attempted to predict the reaction of an accountant to the business setting of 2000. Even though his article was written in 1950, many of his predictions regarding the beginning of the 21st century were fairly accurate. Smith’s prediction of a U.S. population of 250 million is only 31 continued on next page Today’sCPA March/April 2015

FEATURE continued from previous page

The most interesting predictions that Smith made involved accounting education.

million off the actual population of 281,421,906 (US Census 2000). The free enterprise system is still present in America, as Smith predicted, with additional regulation and controls. Plant efficiency and productivity have increased through scientific advances, such as computer technology. However, other predictions made about the business setting were either not very accurate or occurred on a small scale. Smith’s predictions regarding the potential to harness big rivers and divert water to arid areas never occurred, and no plans exist to attempt such a feat in the near future. Also, urban vehicle parking is not all above or below ground as he predicted. However, parking garages above ground and spanning multiple stories are more common than in the 1950s, and underground parking garages do exist in numerous cities. The key points of his paper focused on predictions related to three main topics: professional accounting organizations, auditing and education.

Professional Accounting Organizations Smith envisioned an evolution of accounting certifications, which would ultimately define the individuals within the profession. Smith asserted that CPA would no longer stand for “Certified Public Accountant,” but would be changed to “Certified Professional Accountant.” This prediction makes sense from the perspective of an accountant from the 21st century. He envisioned the CPA evolving into a broader professional role that includes more than public accounting. This evolution has occurred, as CPAs are required to have specialized knowledge in all aspects of business, with consulting a very large component of the profession. No alterations have been made to the acronym, even though “Certified Public Accountant” evokes an assumption that the knowledge tested on the exam consists only of public practice concerns, while the designation Certified Professional Accountant contributes to the thought of professional knowledge 36

encompassing all aspects of the accounting profession – public and private. Smith was correct in the prediction that the content coverage of CPA examinations would be broadened. In 1950, the test lasted 19½ hours and covered four parts, the same four parts established for the first CPA exam in New York in 1896 – Practice, Theory, Law and Auditing. The test has broadened the scope of accounting and business knowledge tested, but remains four sections: auditing and attestation, business environment and concepts, financial accounting and reporting, and regulation. The time to complete the exam has decreased to 14 hours, and it is now administered on a computer. Contrary to Smith’s prediction, rules establishing “that everyone who prepares tax returns for another is required to be registered with the Treasury Department” and by either a licensed attorney or certified professional accountant never occurred. Smith also foresaw the proliferation of “Management Services” divisions within public accounting firms to “offset the curtailment of their most consistent revenue source” (Smith 1954) by the law firms entering into tax practice. Many larger law firms have tax divisions, but the type of work they deal with does not have a substantial effect on public accounting firms. Another accurate prediction was the establishment of the CMA certification. Smith called it the “Chartered Management Accountant,” rather than Certified Management Accountant. Smith felt that the group interested in developing the CMA certification would ultimately decide to embrace the “Certified Professional Accountant” designation and “reserve their specialty for a higher level of attainment.” The National Association of Accountants, currently called The Institute of Management Accountants, established the Institute of Management Accounting, which administered the first CMA exam on Dec. 6-8, 1972 (Van Zante, 2005). Today’sCPA

Additionally, in 2012, the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA) launched the Chartered Global Management Accountant (CGMA) certification. AICPA and CIMA intend for the CGMA to complement the U.S. CPA and “increase the recognition of management accounting worldwide” (CGMA.org). Smith envisioned the American Institute of Accountants performing the same function for accounting as the American Bar Association and the American Medical Association performed nationally for law and medicine (Smith 1954). In 1957, the American Institute of Accountants (AIA) adopted its current name, AICPA, when all members of the Institute became CPAs. During the 1950s, Carman Blough and John Carey of AICPA “aggressively pursued a strategy that raised accounting’s profile and extended its reach and determined to make accounting a premier American profession worthy of a place alongside law and medicine” (Dennis, 2000). In 1950, the AIA was responsible for setting accounting standards through the Committee on Accounting Procedure (CAP), which was founded in 1936. Smith prophesied that the American Institute of Accountants would begin developing accounting principles based more on research by 1980. One of the major reasons for the establishment of the Accounting Principles Board (APB) in 1959 was to base its official pronouncements on studies by the Accounting Research Division. Even though the APB had difficulty in resolving conflicts in accounting and basing opinions on research, Smith was basically correct that a governing body would begin to develop a clear explanation and interpretation of “accepted accounting principles,” now termed generally accepted accounting principles (GAAP). In 1973, the Financial Accounting Foundation created the Financial Accounting Standards Board to “establish and improve standards of financial accounting and reporting for nongovernmental entities” (FASB.org). Additionally, he foresaw the demise of the original historical cost concept, which is still currently under continuous debate, with the International Accounting Standards (IAS) Board leading the way.

Today and How It Got that Way “Auditing Today and How It Got that Way” is a fictional article Smith utilized to discuss the status of auditing in the 21st century. Smith foresaw the implementation of standards that would be enforced with more than just “mild reprimand” and result in stern action. The Sarbanes-Oxley Act (SOX) was enacted to help enforce accounting standards of auditing to ensure accuracy of public company financial statements. Independent auditors must affirm management’s judgment of internal controls to comply with regulation set forth by the Public Company Accounting Oversight Board (PCAOB). Highprofile auditor suspensions have occurred more frequently since SOX was established. However, SOX also had a profound impact on private companies: “many of them family owned, forcing them to spend more time and money on audits and, in some cases, to add outside directors to their corporate boards” (Vuong, 2006). Private companies desire to remain fairly compliant, as best explained by Luis Solis, chief executive of GroupSystems, who stated, “at some point, someone’s going to buy you or you are going to go public” (Vuong, 2006). To prepare for these potential events, a private company should pursue compliancy. Today’sCPA March/April 2015

The strict requirements have resulted in an increase in demand for accounting personnel, while the supply of qualified accounting professionals has decreased (Bloom, Myring, 2008). Smith predicted that the short form report of a public accountant would read: “We have examined as independent accountants, the 1999 operating financial statements of ABC Company of X City. In our judgment, these statements present fairly the financial condition of said company at Dec. 31, 1999, and the results of its operations for the year then ended.” This is one area that did not evolve exactly as Smith predicted; in fact, the process has become much more complex due to governmental regulation and lawsuits. Smith correctly foresaw national firms extending geographically. The Big Four public accounting firms now span all reaches of the globe. A large amount of consolidation has occurred within the small local firms of public accountants due to increased pressure from larger regional firms. As Smith predicted, auditors are no longer management hirelings. Instead, management and the public respect auditors’ reports and are dependent on their opinions. The revolution in technology has resulted in an improvement of internal controls and accounting efficiency, as Smith foresaw. The use of auditing software by CPA firms has enabled auditing to place greater reliability on a smaller sample in the testing of accounting transactions. The use of technology to assist in auditing procedures has “reduced overall audit risk, increased audit confidence, and timeliness that has never been achievable before” (Wallace, 2002). Through the utilization of technology, continuous auditing techniques have provided auditors with additional time to concentrate on “interpretive aspects of the engagement rather than the less routine audit procedure” (Smith 1954).

Education for Accountancy The most interesting predictions that Smith made involved accounting education. Separate schools of accounting have been proposed in accounting literature since the late 1800s (Bloom, Markell, 1986). Smith was correct that some universities would decide to establish separate schools of accountancy, but it occurred later than he expected. Smith thought the separate schools would be established prior to 1965, but the first collegiate school of accounting was established in 1971, which is not that far off from his target (Bloom, Markell, 1986). But separate schools of accounting never became as prevalent as Smith envisioned. A study conducted by Bremser, Brenner and Dascher (1977) found that “few deans seem to favor the professional school concept.” AICPA supported the creation of separate schools of accounting, but the accrediting body Association to Advance Collegiate Schools of Business (AACSB) strongly opposed the idea. In 1980, AICPA decided to concur with AACSB accreditation ideas, which resulted in “the virtual abandonment of an AICPA drive for the establishment of separate schools of professional accounting” (Olson, 1982). Currently, the AACSB provides a separate accreditation for accounting programs. The Federation of Schools of Accountancy was created in 1977 to develop superior accounting programs at universities by ensuring the programs prepare students to be CPAs (Bloom, Markell, 1986). continued on next page 37

FEATURE continued from previous page Smith predicted that by 1985, most major universities (specific number 102) would have adopted separate schools for accountancy. In 1985, separate schools of accountancy were established at over 25 universities, a far cry from the 102 predicted, but not a bad prediction. As time progressed, closer to the year 2000, the desire for separate schools of accounting diminished as educators realized that the quality of the program is more important than the designation as a separate school within the university. An accurate prediction made in regards to education was Smith’s belief that great advances could occur in the area of teaching techniques. Smith predicted the use of visual instruction aids in all accounting courses. Many professors utilize available resources such as PowerPoint and videos to apply the material they are teaching in interesting ways that were not even invented in the 1950s. The prediction that “many schools have no resident lecturing professor in accounting” but use films of big name professors from other schools is not how the current educational accounting system operates yet. However, with online education becoming so prevalent, this prediction may still become true. In fact, the conclusion Smith draws from such a system of securing 30 to 40 percent more work coverage than was possible in 1950 may have become true. Individuals can

purchase lecture DVDs or watch free lecture topics on YouTube to learn about accounting, which is a notable evolution in the availability of education. In addition, scholarships have increased substantially since 1950. In the 1950s, few pursued college degrees, since only 6 percent of the national population had bachelor’s degrees as compared to 27.5 percent in 2009. Accounting education has evolved over the past few decades as content has increased and numerous advances in techniques have occurred.

Correctly Predicting Many Developments in the Accounting Environment Although some of Smith’s predictions were not accurate, he correctly foresaw many developments in the accounting environment. Additionally, there are many aspects of 21st century accounting that Smith did not predict. He never mentioned the 150-credit requirement, and he could not have fathomed the computing power and accounting software that allows small CPA firms to compete with firms with a greater number of employees. However, overall, his sense of the future of accounting was amazing, since many of his predictions were fairly accurate. n

Jeffrey Ritter

is a graduate student at Duke University.

George Romeo, Ph.D.

is professor in the department of accounting at Rowan University. He can be contacted at Romeo@rowan.edu.

Larissa Kyj, Ph.D.

is professor in the department of accounting at Rowan University. She can be contacted at kyj@rowan.edu.

Bibliography AICPA.org. Available from www.aicpa.org/Research/Standards/ AuditAttest/ASB/Pages/AuditingStandardsBoard.aspx. CGMA.org. Available from www.cgma.org/BecomeACGMA/ FAQs/Pages/default.aspx. FASB.org. Available from www.fasb.org/jsp/FASB/Page/ SectionPage&cid=1176154526495. Anonymous. 1955. “The year 1954 in review.” Journal of Accountancy (Pre-1986) 99 (000001) ( Jan 1955): 5. Bloom, Robert, Araya Debessay, and William Markell. 1986. “Development of schools of accounting and the underlying issues.” Journal of Accounting Education 4 (Spring 1986): p. 7. Bloom, Robert, and Mark Myring. 2008. “Charting the future of the accounting profession.” The CPA Journal 78 (6) ( Jun 2008): 65-7. Carey, John. 1970. The rise of the accountancy profession: to responsibility and authority 1937-1969. New York, NY: American Institute of Certified Public Accountants. Dennis, Anita. 2000. “No one stands still in public accounting.” Journal of Accountancy 189 (6) ( Jun 2000): 66-74. McConnell, Donald K., Jr, and George Y. Banks. 2003. “How Sarbanes-Oxley will change the audit process.” Journal of Accountancy 196 (3) (Sep 2003): 49-55. Moores, Tommy, and Gary White. 1985. “Perceptions of the control and effectiveness of schools of accountancy.” Issues in Accounting Education (3): 20. 38

Olson, Wallace. 1982. The accounting profession: Years of trial: 19691980 AICPA. Smith, C. Aubrey. 1954. Accountancy: Circa 2000 A. D. Accounting Review 29 (1) (01): 64, search.ebscohost.com/login.aspx?direct=true &db=buh&AN=7129437&site=ehost-live. Thomson, Jeffrey C. 2011. “Who’s shaping the future of our profession?” Strategic Finance 93 (3) (09): 8-69, search.ebscohost.com/ login.aspx?direct=true&db=buh&AN=65301298&site=ehost-live. U. S. Census Bureau. American Fact Finder fact sheet U.S. Available from www.census.gov/prod/2002pubs/c2kprof00-us.pdf. Van Zante, Neal R. 2005. “IMA’s professional certification programs.” Management Accounting Quarterly 6 (2) (Winter 2005): 22. Vuong, Andy. 2006. “Sarbanes-Oxley act has spinoff effect with private companies, too.” McClatchy - Tribune Business News, Aug 14, 2006. Wallace, Eric P. 2002. “The influence of technology on auditing.” Pennsylvania CPA Journal 72 (4) (Winter 2002): 36-9. Welsch, Glenn, Granof, Michael and Summers, Edward. In memoriam C. Aubrey Smith. memorial resolution. Available from www. utexas.edu/faculty/council/2000-2001/memorials/SCANNED/ smith_c.pdf. Zeff, Stephen A. 2003. “How the U.S. accounting profession got where it is today: Part II.” Accounting Horizons 17 (4) (Dec 2003): 267-81. Today’sCPA

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2015

ENERGY CONFERENCE A P R I L 3 0 - M AY 1 , 2 0 1 5 AUSTIN CONVENTION CENTER

Optional Pre-Conference Behind the Scenes Networking Event April 29th

Up to 18 CPE Hours Todayâ&#x20AC;&#x2122;sCPA March/April 2015

TSCPA CPE 39

CPE ARTICLE

Avoiding the Nonprofit

Tax Minefield

Curriculum: Tax

Level: Basic

Designed For: CPAs working with nonprofit organizations and tax practitioners Objectives: Professionals will understand IRS compliance requirements for nonprofit organizations and will be able to identify the critical aspects of compensation, lobbying, political contributions, and unrelated business income that put nonprofit organizations at risk for loss of tax exempt status and/or tax liability Key Topics: IRS reporting, employee compensation, lobbying expenditures, political contributions, unrelated business income, filing requirements Prerequisites: None Advanced Preparation: None 40

Todayâ&#x20AC;&#x2122;sCPA

By Jim Martin, CPA, and Barbara Scofield, CPA, Ph.D.

Whether it’s a large, established charity, a small nonprofit private foundation, a school club or anything in between, there are many ways to run afoul of Internal Revenue Service (IRS) rules and regulations. A simple misstep in the management of a nonprofit entity can change the nonprofit organization from a tax-exempt entity to a tax-paying entity. It can also result in substantial taxes on the organization’s management. This article addresses a few of the critical issues facing nonprofit organizations that wish to remain tax exempt. Most nonprofit organizations’ only interaction with the IRS involves the submission of an annual information report (Form 990) at the end of the year. An imposing form, the 990 requires detailed reporting of revenue and expense items for the entity along with similarly detailed balance sheet reporting. However, what is often considered most imposing is Form 990’s required nonfinancial disclosures. Over 100 questions await the Form 990 preparer, covering topics such as officer and director compensation, governance, programming, lobbying and political activity. Additional schedules may also be required, such as Schedule A for public charities, Schedule B for a list of contributors, and Schedule C for political and lobbying activities. A total of 16 additional schedules may be required to be filed, depending on the organization’s operations. Form 990 is due by the 15th day of the fifth month after the nonprofit’s yearend. An automatic three-month extension is available to nonprofit filers who file Form 8868. A second nonautomatic three-month extension may also be requested. Some degree of compliance paperwork relief is available to smaller nonprofit organizations. Form 990-EZ may be filed by many nonprofits with gross receipts of less than $200,000 and total assets less than $500,000 at yearend. This form, which requires roughly half the information reported in Form 990, is likewise due by the 15th day of the fifth month after the nonprofit’s yearend. Automatic and non-automatic extensions of time are also available to filers of Form 990-EZ. Form 990-N is available to many nonprofits whose annual revenues are $50,000 or less. Known as the e-Postcard, this form is filed online and requires answering eight basic questions. It is also due by the 15th day of the fifth month after the nonprofit’s yearend. Critical Issue: Compensation. There are a number of key issues that should be reviewed and addressed prior to a nonprofit entity making its annual Form 990 filing with the IRS. These issues should be of interest to a nonprofit organization’s board members, management, donors and accountants. A lack of attention to these topics could, in some cases, lead to the assessment of substantial excise taxes and the possible loss of nonprofit status. A review of Form 990 will lead one to easily see the elevated status in the eyes of the IRS of the determination of reasonable compensation paid by the entity. No other single item on the Form 990 requires such an extensive level of reporting. Even putting aside tax considerations and looking at compensation from purely Today’sCPA March/April 2015

a governance perspective, payment of reasonable compensation is just good business. In the case of charitable and other nonprofit organizations, donors and other sources of funding rightfully have an expectation that their support is being prudently used and not improperly enriching nonprofit employees. Nonprofits are required to report individual compensation information for officers, directors, trustees, key employees, highly compensated employees and independent contractors on Form 990. (A discussion of the definition of terms like “key employees” is beyond the scope of this article.) A determination by the IRS of excess benefits (of which compensation is a part) paid to these parties will result in an excise tax of 25 percent imposed on the recipient and potentially an excise tax on the nonprofit organization’s manager of 10 percent. The IRS may also revoke an organization’s nonprofit status as it takes into consideration the size, scope, number of excess transactions, safeguards and corrections of past transactions. The IRS defines reasonable compensation to be the value that would ordinarily be paid for like services by like enterprises under like circumstances. There is a rebuttable assumption of reasonableness if the following three conditions are met: 1) The transaction is approved by an authorized body of the organization (or an entity it controls), which is made up of individuals who do not have a conflict of interest concerning the transaction. 2) Before making its determination, the authorized body obtained and relied upon appropriate data as to comparability. 3) The authorized body adequately documents the basis for its determination concurrently with making that determination. Adherence to this three-step process by the nonprofit is the lynchpin to avoiding the taxes associated with a finding by the IRS that the entity’s compensation levels were unreasonable. Critical Issue: Lobbying. Nonprofit entities are allowed to spend money to influence legislation (lobby). Approximately 2.5 percent of nonprofit organizations reported lobbying in 2013 with an average lobbying expenditure of $100,513. In general, entities considered nonprofit via Sections 501(c)(4) (social welfare organizations), 501(c)(5) (agricultural and horticultural organizations) and 501(c) (6) (business leagues, chambers of commerce, boards of trade and similar organizations) have substantial freedom to lobby, but offer continued on next page 41

CPE ARTICLE continued from previous page no tax deduction to those contributors to the nonprofit funding the lobbying. A discussion of these three types of entities is beyond the scope of this article. Specific rules, however, limit the amount of lobbying allowed by those nonprofit entities that are Section 501(c)(3) entities (public charities and private foundations). In general, an organization may not qualify for Section 501(c)(3) status if a “substantial part” of its activities is attempting to influence legislation. The term “substantial part” may be determined one of two ways. 1) The Substantial Part Test. The IRS makes a determination based on the basis of all the pertinent facts and circumstances in each case. The IRS considers a variety of factors, including the time devoted (by both compensated and volunteer workers) and the expenditures devoted by the organization to the activity, when determining whether the lobbying activity is substantial. 2) The Expenditure Test. Organizations other than churches and private foundations may elect the expenditure test as an alternative method for measuring lobbying activity. Once this election has been made, it remains in effect for all future years until revoked. Under the expenditure test, the extent of an organization’s lobbying activity will not jeopardize its tax-exempt status, provided its expenditures, related to such activity, do not normally exceed an amount calculated using Table 1. This limit is generally based on the size of the organization and may not exceed $1 million, as indicated in Table 1. (Attempts to influence the general public on legislative matters, or grassroots lobbying, are also limited to 25 percent of this total lobbying limitation.) Under the expenditure test, if over a four-year averaging period the organization’s average annual total lobbying or grassroots lobbying expenditures are more than 150 percent of its dollar limits, the organization will lose its exempt status, making all of its income for that period subject to tax. Should the organization exceed its lobbying expenditure dollar limit in a particular year, it must pay an excise tax equal to 25 percent of the excess. It is therefore imperative that, in order to avoid this form of taxation, Section 501(c)(3) nonprofit entities operate within the bounds of the “substantial part” rules. This requires such entities to maintain their lobbying expenditures within either the limits set by the expenditure test, if elected, or within the more ambiguous limitations specified for non-electors of the expenditure test.

Table 1 If the amount of exempt purpose expenditures is: ≤ $500,000

Lobbying nontaxable amount is: 20% of the exempt purpose expenditures

>$500,000 but ≤ $1,000,000

$100,000 plus 15% of the excess of exempt purpose expenditures over $500,000

> $1,000,000 but ≤ $1,500,000

$175,000 plus 10% of the excess of exempt purpose expenditures over $1,000,000

>$1,500,000

$225,000 plus 5% of the exempt purpose expenditures over $1,500,000

Critical Issue: Political Contributions.The rules governing nonprofit organizations and their ability to make political contributions are similar to the rules detailed above governing lobbying expenditures. Less than 0.6 percent of nonprofit organizations reported political contributions in 2013. In general, Sections 501(c)(4) entities (social welfare organizations), 501(c) (5) (agricultural and horticultural organizations) and 501(c)(6) (business leagues, chambers of commerce, boards of trade and similar organizations) may make political contributions. This can be done through use of its own funds or by setting up a separate segregated fund under Section 527(f )(3). Like the funding of lobbying expenditures, there is no tax deduction to those contributors for money contributed to the nonprofit entity that is used for funding the political contributions. A discussion of these entities is again beyond the scope of this article. Section 501(c)(3) entities (public charities and private foundations) are strictly prohibited from participating directly or indirectly in political campaigns. This prohibition includes financial contributions and making written or verbal statements in support of or against particular candidates running for office. Section 501(c)(3) entities are allowed to participate in certain nonpartisan voter education activities, such as the publishing of voter education guides. They may also be allowed to participate in nonpartisan activities that encourage individuals to get out and vote, such as voter registration drives. Taxes on Section 501(c)(3) entities that participate in political campaigns are substantial. There is a 10 percent (of the amount involved) excise tax that must be paid by the nonprofit entity that made the political expenditure. There is also a 2.5 percent excise tax on the organization manager who agreed to the expenditure. The 2.5 percent excise tax is limited to $5,000 per expenditure. In addition to these excise taxes, there are additional second-tier taxes on both the nonprofit entity and the manager. These second-tier taxes are assessed if the political expenditure is not “corrected” within a “taxable period.” The term “corrected” means recovery of part or all of the expenditure to the extent recovery is possible, establishment of safeguards to prevent future political expenditures, and where full recovery is not possible, such additional corrective action as is prescribed by IRS regulations. The “taxable period” begins on the day the expenditure is made and ends on the earlier of the day a deficiency notice is mailed for the initial 10 percent excise tax or the date the initial 10 percent excise tax is assessed. The second-tier tax on the nonprofit entity is calculated to be 100 percent of the expenditure made. The second-tier tax on the manager is calculated to be 50 percent of the expenditure made. The IRS does have the ability to abate these excise taxes in situations where the tax in question was due to reasonable cause and not willful neglect and the expenditure was properly corrected. Critical Issue: Unrelated Business Income. In general, nonprofit entities do not pay income taxes. However, if the nonprofit organization has “unrelated business income” (UBI) in excess of $1,000 in a given year, it is required to pay UBI income tax and must file Form 990-T. Approximately 9.9 percent of nonprofit organizations reported UBI in 2013, with an average amount of $36,663 for those reporting. For a nonprofit organization, UBI is Today’sCPA

net income: 1) from a trade or business and 2) that is regularly conducted by the nonprofit entity and 3) that is not substantially related to the exempt purpose or function of the organization. Net income not meeting all three of these criteria is not subject to the tax. As an example, passive income is generally not subject to the unrelated business income tax. The Internal Revenue Code and Regulations (IRC) provide additional details as to this three-part test, as well as codified exceptions for certain nonprofit entities. A complete discussion of this matter is beyond the scope of this article. For nonprofit corporations subject to unrelated business income tax, the tax is calculated using regular corporation tax rates. Form 990-T is due by the 15th day of the fifth month after the nonprofit’s yearend. For nonprofit trusts subject to unrelated business income tax, the tax is calculated using regular trust tax rates. Form 990-T is due by the 15th day of the fourth month after the nonprofit’s yearend. Like regular income tax, estimated quarterly estimated unrelated business income tax payments by the nonprofit entity are required. Critical Issue: Failure to File Form 990. In general, Forms 990 and 990-EZ are required to be filed by the 15th day of the fifth month after the nonprofit’s yearend. Extensions of time to file are available. There are additional disclosure rules for nonprofit organizations too. Unlike tax returns filed by for-profit entities, the nonprofit organization’s three most recently filed information returns must be made available for the public to review. Regarding late filing penalties, small nonprofit entities, entities with gross receipts of $1 million or less, are assessed a penalty of $20 per day the return is filed late. The maximum penalty for this smaller nonprofit is the lesser of $10,000 or 5 percent of the entity’s gross receipts. Late filing nonprofit entities with gross receipts greater than $1 million are assessed a penalty of $100 per day for late filing. The maximum penalty for large nonprofits is the lesser of $50,000 or 5 percent of gross receipts. Nonprofit managers are also subject to assessment of a $10 per day penalty for each day the return is filed late, with a maximum of $5,000. There is no penalty assessed for late filing a Form 990-N (e-Postcard). Nonprofit entities that do not file their annual information return (Form 990, 990-PF or 990-EZ) for three years will have their federal tax exempt status automatically revoked. These entities then become taxable organizations and contributions to these entities, in the case of a former public charity, are no longer tax deductible by the donor. Following loss of nonprofit status, entities may request reinstatement by filing an application for exemption and paying a fee. If, upon reviewing such a request, the IRS determines

the entity meets the requirements for nonprofit status, it will issue a new determination letter to the nonprofit. n IRS Circular 230 Disclosure. Any advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

References 1) Internal Revenue Code of 1986 2) www.irs.gov

Jim Martin, CPA

is an MPA graduate from The University of Texas at Austin and is the Henrietta and G.W. Snyder Jr. Professor in Business at Washburn University in Topeka, Kansas. He can be reached at jim.martin@washburn.edu.

Barbara W. Scofield, CPA

holds a Ph.D. in Accounting from The University of Texas at Austin and is a licensed CPA in Texas. She is a professor of accounting at Washburn University in Topeka, Kansas. She may be contacted at barbara.scofield@washburn.edu.

Today’sCPA March/April 2015

CPE QUIZ

By Jim Martin, CPA, and Barbara Scofield, CPA, Ph.D.

CPE Article: Avoiding the Nonprofit Tax Minefield 1 Form 990:

6 An action that can cause the revocation of tax-exempt status of a 501(c) (3)

A. Requires nonprofit entities to disclose only financial information. B. Requires nonprofit entities to disclose only non-financial information. C. Requires nonprofit entities to disclose both financial and non-financial information. D. Requires nonprofit entities to disclose non-financial information and financial information is optional.

2 If a charity has gross receipts of $300,000, assets of $400,000 and a June 30 yearend, Form 990 is due by: A. April 15. B. July 15.

C. November 15. D. No Form 990 needs to be filed.

3 A nonprofit entity may demonstrate “reasonable” compensation paid by: A. Identifying one other organization that pays the same amount of compensation. B. Documenting its investigation of the compensation paid by like enterprises in like circumstances. C. Limiting the cash salary paid. D. Obtaining an expert opinion on compensation.

4 What types of nonprofit entities can engage in lobbying: A. B. C. D.

Social welfare organizations (501(c) (4)) Chambers of commerce (501(c) (6)) Private foundations (501(c) (3)) All of the above

entity include: A. B. C. D.

7 Political contributions are made by: A. B. C. D.

A. B. C. D.

Using only the substantial part test. Using only the expenditure test. Using either the substantial part test or the expenditure test. These organizations have no limit on their lobbying.

Less than 1 percent of nonprofit entities. Between 1 percent and 6 percent of nonprofit entities. More than 10 percent of nonprofit entities. No nonprofit entities.

8 Tax regulation violations can put an organization manager at risk for IRS assessments when: A. B. C. D.

A 501(c) (3) organization participates in a political campaign. A 501(c) (3) organization participates in lobbying. A 501(c) (4) organization participates in a political campaign. A 501(c) (4) organization participates in lobbying.

9 A religious organization would pay tax on unrelated business income, in excess of $1,000, if: A. B. C. D.

5 Churches and private foundations (501(c) (3) organizations) can demonstrate that they are within requirements to limit lobbying by:

Failure to file Form 990 for three years. Having unrelated business income. Paying salaries to its board and executives. Having lobbying expenditures that exceed the amount of its unrelated business income.

The organization accepts cash donations from nonmembers. The organization accepts noncash donations from its members. The organization has a capital gain when equity investments are sold. The organization operates a restaurant to earn funds for its tax-exempt purpose.

10 Nonprofit and business organizations differ in that: A. B. C. D.

Only nonprofit organizations must disclose their tax filings to the public. All nonprofit organizations offer tax deductibility for donations received. Only nonprofit organizations can make political contributions. All nonprofit organizations are prohibited from competing with for-profit entities.

Today’s CPA offers the self-study exam above for readers to earn one hour of continuing professional education credit. The questions are based on technical information from the preceding article.

PARTICIPATION EVALUATION

Mail the completed test by April 30, 2015, to TSCPA for grading.

3. The article and exam were well suited to my background, education and experience: 5___ 4___ 3___ 2___ 1__.

If you score 70 or better, you will receive a certificate verifying you have earned one hour of CPE credit – granted as of the date the test arrived in the TSCPA office – in accordance with the rules of the Texas State Board of Public Accountancy (TSBPA). If you score below 70, you will receive a letter with your grade. The answers for this exam will be posted in the next issue of Today’s CPA.

5. It took me___hours and___minutes to study the article and take the exam.

To receive your CPE certificate by email, please provide a valid email address for processing.

(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____. 4. My overall rating of this self-study exam is: 5____ 4____ 3____ 2__ 1____. Name _______________________________________ Company/Firm__________________________________________ Address (Where certificate should be mailed)_____________________________________________________________ City/State/ZIP_________________________________________________________________________________________ Email Address________________________________________________________________________________________ Please make checks payable to The Texas Society of CPAs. __ $15 (TSCPA Member) __ $20 (Non-Member) 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.

Answers to last issue’s self-study exam: 1. D 2. B 3. D 4. C 5. B 6. A 7. B 8. C 9. C 10. C 44

Today’sCPA

TSCPA CPE COURSE CALENDAR

Mark Your Calendar – April and May 2015 CPE Courses Date

Course

CPE Credit

City

4/16

Personal and Professional Ethics for Texas CPAs

Houston

4/24

Technology Essentials for Today’s CPA

Corpus Christi

4/27

Personal and Professional Ethics for Texas CPAs

Addison

4/30 – 5/1

Energy Conference

Austin

5/4 – 5/5

2015 Texas CPA Technology Conference

Richardson

5/7 – 5/8

2015 Texas CPA Technology Conference

Houston

5/11

Accounting and Auditing Update for Tax Practitioners

Houston

5/11

Current Economic Issues and Their Impact on the CFO/Controller

Dallas

5/11

Personal and Professional Ethics for Texas CPAs

Houston

5/12

GAAS From A to Z

Houston

5/12

It Cost What! A Practical Approach to Implementing Activity Based Costing

Dallas

5/13

Accounting and Auditing Update for Tax Practitioners

Dallas

5/14

Financial Statement Presentation and Disclosures-A Realistic Approach

Fort Worth

5/14

GAAS From A to Z

Dallas

5/14

Annual Update for Controllers

Houston

5/15

Financial Forecasting and Decision Making

Houston

5/18 – 5/19

Non-Profit Organizations Conference

Dallas

5/18

Personal and Professional Ethics for Texas CPAs

Odessa

5/19

Advanced Compilation and Review Engagement Issues

San Antonio

5/20

Audits of 401(k) Plans: New Developments and Critical Issues

San Antonio

5/21

Advanced Compilation and Review Engagement Issues

Houston

5/21

FASB Review for Business & Industry

Dallas

5/22

Audits of 401(k) Plans: New Developments and Critical Issues

Houston

5/22

Statement of Cash Flows: Preparation and Presentation

Dallas

5/26

Auditing Employee Benefit Plans

Houston

5/26

Personal and Professional Ethics for Texas CPAs

Addison

5/27

Auditing Employee Benefit Plans

Dallas

5/28

Current Economic Issues and Their Impact on the CFO/Controller

Houston

5/28

Financial Statement Presentation and Disclosures

San Antonio

5/28

Annual Update for Controllers

Dallas

5/29

Financial Forecasting and Decision Making

Dallas

5/29

Financial Statement Presentation and Disclosures

Austin

5/29

It Cost What! A Practical Approach to Implementing Activity Based Costing

Houston

Today’sCPA March/April 2015

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