Today's CPA SEPT/OCT 2014 by The Warren Group

Today’sCPA SEPT/OCT 2014

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

TSCPA’s 2014

RISING

Closing the Generation Gap: Tips for Interviewing Millennials Social Networking: Legal Issues and Implications for Employer Policies CPE: Fair Value Accounting: An Overview

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CONTENTS

CHAIRMAN

VOLUME 42, NUMBER 2 SEPTEMBER/OCTOBER 2014

Mark Lee, CPA

EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE

cover story

EDITORIAL BOARD CHAIRMAN Winford Paschall, CPA

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

26 TSCPA’s 2014 Rising Stars

TSCPA’s 2014

RISING

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

society features 14 Spotlight on CPAs Wheels of Justice 24 Capitol Interest What’s Up for the Next Session? CPAs Running for Office

COLUMN EDITORS

technical articles

Greta P. Hicks, CPA Mano Mahadeva, CPA, MBA C. William (Bill) Thomas, CPA, Ph.D.

32 Closing the Generation Gap: Tips for Interviewing Millennials

WEB EDITOR Wayne Hardin whardin@tscpa.net

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

DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton CLASSIFIED Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501 dfritz@tscpa.net

Editorial Board Arthur Agulnek, CPA-Dallas; Kristan Allen Crapps, CPA-Houston; James Danford, CPA-Fort Worth; Melissa Frazier, CPA-Houston; Greta Hicks, CPAHouston; Baria Jaroudi, CPA-Houston; Tony Katz, CPA-Dallas; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Winford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-Central Texas.

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

36 Social Networking: Legal Issues and Implications for Employer Policies 39 CPE: Fair Value Accounting: An Overview columns 4 Chairman’s and Executive Director’s Message TSCPA 2020: Introducing the New Strategic Plan 6 Tax Topics 2014 IRA Court Rulings 7 Business Perspectives An Uncertain Road 8 Accounting and Auditing Proposed PCAOB Standard Provides a Glimpse of Audit Report of the Future 10 Tech Issues Cyber Incidents and Disclosure Controls 12 Chapters 2013-2014 Outstanding Chapter Awards

departments 16 Take Note 46 Classifieds

© 2014, Texas Society of CPAs. The opinions expressed herein are those of the authors and are not necessarily those of the Texas Society of CPAs. Today’s CPA (ISSN 00889-4337) is published bimonthly by the Texas Society of Certified Public Accountants; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408. Member subscription rate is $3 per year (included in membership dues); nonmember subscription rate is $28 per year. Single issue rate is $5. Periodical POSTAGE PAID at Dallas, TX and additional mailing offices. POSTMASTER: Send address changes to: Today’s CPA; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408.

Today’sCPA September/October 2014

CHAIRMAN’S AND EXECUTIVE DIRECTOR’S MESSAGE

TSCPA 2020: Introducing the New Strategic Plan

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

SCPA develops a new strategic plan every three years, and a new plan was recently created after gathering crucial input from an extensive range of members, as well as leaders, volunteers and staff. The plan will guide the organization from 2014 until 2017 and into the future. In this issue of Today’s CPA magazine, we’ll review the Mission Statement and highlight the first two objectives. Next issue, we’ll follow up and discuss the remaining three objectives. Strategic planning sessions were held for two important areas – CPE and membership – where participants analyzed factors that would be essential to ensure the financial success of the organization. Members and staff participated in the session on CPE, and a comprehensive, representative survey was distributed to 5,000 members, inquiring about their CPE buying habits and preferences. For the strategic planning session on membership, participants included TSCPA’s Membership Committee, Young and Emerging Professionals Committee and Diversity and Inclusiveness Committee. A comprehensive, representative survey was sent to 5,000 members for the membership area. The survey encompassed openended questions that probed the problems and issues that CPAs and the accounting profession are facing. The results of the CPE and membership planning sessions, as well as the surveys, were presented at a strategic planning retreat last December. The retreat included TSCPA’s Strategic Planning Committee, Executive Board and staff directors. They looked at the previous plan, applied the results of the two strategic planning sessions and surveys, and developed a new plan with five new objectives. The next step was for TSCPA’s management team to hold a meeting to examine the tasks and strategies of the previous plan and review them for applicability to the new proposed plan. They carried forward previous tasks and strategies into the proposed plan and developed new ones where appropriate. A written strategic plan was created from the new objectives and tasks. The Strategic Planning Committee reviewed the new plan, and it was then approved and adopted for the organization by the Executive Board at its April meeting. The plan was introduced at

the Annual Meeting of Members and Board of Directors Meeting in June. Following is a summary. Mission Statement. The Texas Society of CPAs exists to support its members in their professional endeavors and to promote the value and high standards of Texas CPAs. The objectives of the plan are: • Professional Competency • Career Success • Advocacy • Culture and Community • Operational Excellence

Mark Lee

John Sharbaugh

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

Professional Competency. With this objective, TSCPA is committed to providing best-in-class professional development opportunities, an exceptional Peer Review program, and other resources designed to assist members in maintaining their competency. The TSCPA CPE Foundation will continue to offer quality education program content and promote the availability of courses online through the web. In addition, mobile device applications will be considered as a potential delivery method for CPE courses. The Peer Review program exists as an effective means to ensure quality work and professional competency of CPAs, and firms’ accounting and auditing practice. TSCPA will communicate that Peer Review is a service that improves firm excellence and serves the public interest. In the area of professional ethics, TSCPA will continue to provide resources and guidance to help CPAs navigate professional ethics issues and comply with standards. Career Success. In this area, TSCPA will continue to provide tools and resources to help members compete and thrive in their careers and the accounting profession. Since developing leaders is a goal of the organization, TSCPA will promote its Leadership Development Institute and encourage the chapters to consider leadership programs locally. CPE courses that develop “success skills” will be offered, along with the technical accounting courses. In addition, TSCPA peer-topeer networking will be promoted at the state and chapter levels, and TSCPA will also use technology, including social media and online communities, for connecting, educating and keeping members current on relevant issues. To see the new plan, visit TSCPA’s website at tscpa.org. On the homepage, go to About TSCPA, then Governance, and click on Strategic Plan. Be sure to read the next issue of Today’s CPA, where we’ll cover the remaining three objectives of the plan. n can be contacted at jsharbaugh@tscpa.net. Today’sCPA

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TAX TOPICS

2014 IRA Court Rulings

By Greta Hicks, CPA | Column Editor

here have been two court rulings with related Internal Revenue Service (IRS) announcements that have made a dramatic change in the handling of individual retirement account (IRA) transactions. First, in Clark v. Rameker, Trustee, Et Al, the Supreme Court held that an inherited IRA does not share the same characteristics as a traditional IRA, and held that an inherited IRA is not “retirement funds” within the meaning of Section 522(b)(3)(C); therefore, the inherited IRA is not exempt retirement funds for bankruptcy purposes. Secondly, you cannot rely upon IRS Pub 590 or Proposed Regulation 1.408-4-(b)(4)(ii) for correct interpretation of Section 408(d)(3)(B), timing of IRA rollovers. Effective after Dec. 31, 2014, the decision in Bobrow v. Commissioner, T.C. Memo 2014-21 and resulting IRS Announcement 2014-15 have declared that only “one” rollover from all IRAs can be made in a one-year period of time versus “one” rollover from a single IRA. History of IRA rollovers: Section 408(d)(3)(A)(i) provides generally that any amount distributed from an IRA will not be included in gross income of the distributee to the extent the amount is paid into an IRA for the benefit of the distributee no later than 60 days after the distributee receives the distribution. Catch: Section 408(d)(3)(B) provides that an individual is permitted to make only one rollover described in 408/(d)(3)(A)(i) in any one-year period. Pre-2015 interpretation, IRA-by-IRA basis: IRS Publication 590, page 25 says, in part: “Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a one-year period, make a tax-free rollover of any later distribution from that same IRA.” Post-Dec. 31, 2014, interpretation, aggregate basis: In response to the Bobrow case, the IRS released Announcement 2014-15, which holds the one-transfer-per-year rule to apply to all IRAs in the aggregate rather than individually to each IRA beginning to any distribution occurring after Dec. 31, 2014. An aggregate basis means that an individual could not make an IRA-to-IRA rollover if he/she made such a rollover involving any of the individual’s IRAs in the preceding one-year period. Exceptions to the once-per-year rollover rule: • IRA to Roth IRA conversions. • First-time homebuyer distributions that are cancelled or delayed. • Qualified reservist distributions that are timely repaid. • Rollovers made from or to an employer retirement plan, such as a 401(k). • IRA trustee-to-trustee transfer of funds from one IRA trustee directly to another trustee, because such a transfer is not a Greta Hicks, CPA 6

rollover and therefore is not subject to the one rollover-per-year limitation of Sec. 408/(d)(3)(B). Transferring funds directly between trustees does not result in a “distribution” within the meaning of Sec. 408(d)(3)(A). Since such funds are not within the direct control and use of the participant, they are not considered to be “rollover contributions.” See Rev. Rul. 78-406, 1978-2 C.B. 1573. Key points: • Regardless of how many IRAs he/she maintains, a taxpayer may make only one nontaxable rollover contribution within each one-year period. • The one-year limitation period begins on the date on which a taxpayer withdraws funds from an IRA and has no relation to the calendar year. Thus, for example, a taxpayer may not make a nontaxable rollover on Dec. 31 of one calendar year and make another nontaxable rollover on Jan. 1 of the next calendar year. • The decision in Bobrow was governed by the rulings in Martin v. Commissioner, T.C. Memo 1992-331, 63 T.C.M. (CCH) 3122, and Martin v. Commissioner, T.C. Memo 1994-213. • The use of the funds distributed from an IRA during the 60day period is irrelevant to the determination of whether the distribution is a nontaxable rollover contribution. See Zaklama v. Commissioner, T.C. Memo 2012-346. • Section 408(d)(I) provides that the 60-day requirement for redepositing funds into an IRA may be waived by the secretary “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the individual subject to such requirement.” • Also, in Wood v. Commissioner, 93 T.C. 114 (1989), the taxpayer’s financial institution made a bookkeeping error that resulted in the taxpayer’s rollover contribution not being transferred to the taxpayer’s new IRA within 60 days of the distribution. • Rev. Proc. 2003-16, 2003-1 C.B. 359, provides guidance to taxpayers seeking waiver of the 60-day requirement, including two methods by which taxpayers may have the requirement waived: oo Apply for a hardship exception. oo Receive automatic approval under certain circumstances. The IRS will correct Pub. 590 and related regulations and the financial institutions are busy updating their IRA contracts and agreements. Not only do tax professionals need to be current by reading the quoted legal references, but we also need to make sure our clients are aware of these dramatic changes. 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. Today’sCPA

BUSINESS PERSPECTIVES

An Uncertain Road

By Mano Mahadeva, CPA, MBA | Column Editor

n unexpected volcanic eruption in Iceland shuts down air traffic across northern Europe. A massive wall of water created by an earthquake off the shores of Japan creates major shortages of critical components for car makers in the United States. Millions of email users find themselves without emails or messages. An increased number of violent storms and twisters roll across the central United States, causing massive damage and closures. Sophisticated cyber-attacks on specific networks bring organizations to their knees. In the past few months alone, we have witnessed major political and sectarian upheavals in Ukraine, Syria and Israel, leading to the possible re-routing of air transport across the globe. We have seen a resurgence of the Ebola virus in western Africa, leading to questions of containment. Argentina failed to make a bond payment, and the second largest bank in Portugal filed for bankruptcy. Any of these events can cause a single point of failure within an organization, leading to a disastrous effect. It is clear that planning for and managing risks such as these and others will continue to be a challenge, as we face newer types and forms of risk. As exposures are different, customized approaches to remedy them may be called upon. Therefore, an effective risk management approach separates exposures into specific categories that reflect their distinguishing characteristics. Many of these exposures fall into the following categories: market risk, credit risk, liquidity risk, operational risk, model risk, regulatory risk, reputational risk, legal risk, tax risk, accounting risk and sovereign and political risk. Market risk is a broad area and includes interest rate risk, exchange risk, equity risk and commodity price risk. Each of these revolves around the availability and need of its product. Credit risk relates to the possibility of a debtor not following through on a promise to pay an obligation in full. Liquidity risk is the ability to receive fair value on an asset if the asset is sold immediately to help relieve a cash need. Operational risks happen within an organization, due to internal or external events. External events include acts of nature and even terrorism; internal events could include fraud or even an unintentional accounting misstatement. Model risk plays an important role in valuations as the application of an inappropriate model or incorrect inputs impair value. Regulatory risk is the uncertainty in regulation that results from the rotation of politicians in elected office. The newly elected politicians may create a difference in collective views on regulation, possibly increasing

restrictions and costs of the market. Reputational risk is the possibility of loss resulting from damages to a company’s reputation or as a matter of corporate trust. Legal risk refers to contracts where one party argues that the other party did not perform its duties as called for. Tax risk is the application ambiguity in present day tax law or on the uncertainty of future tax law, such as in the discussion and debate about inversions. Accounting risk is recording a transaction that causes variations in an income statement. The application of the new standard for revenue recognition that requires significant management judgment is an example. Sovereign risk is the ability of a country to pay its debt, whereas political risk is about the willingness of a country to pay its debt. If boards of directors are working hard to fulfill their responsibility for organizational strategy, they also need to understand if key risks such as those above and others are being managed effectively. This responsibility can be carried out by the full board or through a subcommittee, provided that the overall oversight responsibility remains with the full board. Following the recent financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, within which Sec. 165 will require large bank holding companies to create a standalone, board-level risk committee, distinct from the audit committee. This requirement may suit companies that have complex circumstances and rapidly changing business environments. General Motors recently established a new risk committee to oversee its company policies and procedures to enforce standards in areas such as vehicle safety and product quality. The formation came after an internal investigation that detailed missteps in recalling vehicles with defective ignition switches. If a board decides that a risk committee is beneficial for an organization, the structure, role and activities of this committee should be carefully thought out with consideration of the roles and responsibilities of the other subcommittees, within the broader framework of risk oversight. Boards seeking members with risk experience will have to seek strategic thinkers who are also knowledgeable about the way the organization works. Since risk is “forward-looking,” potential candidates will also be required to exercise greater judgment. Unfortunately for boards seeking these “experts,” the talent pool remains limited, due to the greater recent focus on risk. However, these moments provide an excellent opportunity for finance leaders to further augment and showcase their roles and capabilities as able stewards of an organization’s financial health. n

Since risk is “forward-looking,” potential candidates will also be required to exercise greater judgment.

Mano Mahadeva, CPA

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 September/October 2014

ACCOUNTING & AUDITING

Proposed PCAOB Standard Provides a Glimpse of Audit Report of the Future

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

n August 2013, the Public Company Accounting Oversight Board (PCAOB) issued Release No. 2013-005 for public comment, containing proposed changes in the unqualified auditor’s report, as well as changes in auditors’ responsibilities regarding other information in documents containing audited financial statements for public companies. These proposed changes mirror those being proposed in the European Union (EU) by the International Auditing and Assurance Standards Board (IAASB) and those that have already been implemented in the United Kingdom (UK) by the Financial Reporting Council (FRC). If implemented, these changes would expand U.S. auditors’ reporting responsibilities and the role auditors play in providing information to financial statement users. The proposed changes:

• Auditors would be required to include in the audit report “critical audit matters” (CAMs) specific to the audit. These include the most difficult, complex or significant judgments, areas that posed the most difficulty in obtaining significant appropriate audit evidence, and areas that posed the most difficulty in forming an opinion on the financial statements.1 • Auditors would be required to expand their procedures regarding “other information” contained in the annual report, such as management’s discussion and analysis (MD&A) and include a description in the audit report of those procedures, as well as results of those procedures leading to the auditor’s “evaluation” of the other information.

PCAOB has based its recommendations for these changes on findings in academic research and the findings of the U.S. Department of Treasury’s Advisory Committee on the Auditing Profession that investigated the role of the U.S. auditing profession during the banking crisis of 2008. These studies contend that, to make more informed decisions, investors need more detailed information on the audit process than they currently obtain from the standard audit report.

Background The basic wording of the unqualified audit report in the United States has not changed since the 1940s. The intent of the message in the audit report is to report a two-dimensional message, specifically: (1) that an audit process in accordance with professional standards has been conducted on the financial statements; and (2) based on that process, the auditor has concluded, with reasonable assurance, that the financial statements are free from material misstatement. The auditor’s reporting responsibility has been intentionally restricted to these two dimensions. Any further information in the annual report, including inside, as well as outside, the financial statements, is strictly the responsibility of management. Because of cost-benefit concerns, as well as the threat of potential legal exposure, both the auditing profession and the financial reporting community 8

Today’sCPA

have traditionally been very protective of these parameters. The audit report has been labeled as an essentially pass/fail model – either the financial statements are fairly presented in all material respects or they are not.

Reaction of the Profession to Date PCAOB held public meetings earlier this year and received written comments from various constituent groups (preparers, various professional associations, brokers/dealers, audit committee members, investors, audit firms, etc.) about the proposed report changes. Most commenters generally supported the idea of more meaningful audit communications in some form, but there was a widespread diversity of views as to how to get there. While about 50 percent of the investor group supported disclosure of CAMs in the audit report similar to the UK model, 83 percent of total comment letters received by PCAOB opposed it in its present form. Reasoning included cost/benefit concerns, as well as expansion of the role of auditors to become primary providers of information, rather than verifiers. Potential legal liability also played a role. Various suggestions were offered to improve PCAOB’s proposal regarding disclosure of CAMs, including auditor attestation services on critical accounting policies of MD&A, better guidelines to identify CAMs and clearer standards of materiality.

C. William Thomas

Seventy-eight percent of respondents opposed PCAOB’s proposal to amend the standard requiring extended auditor involvement with other information in annual reports. The principal area of concern was the proposed requirement for auditor “evaluation” of this information. However, there was general support for clarifying the auditor’s responsibility for it.

Where do We Stand Now? PCAOB extended the comment period on its proposals to May 2014. As of the date of the writing of this column, no additional information is available. However, given that global standard setters are already moving on the issue and that enhanced auditor reporting is already a reality in the UK, we can expect that enhanced auditor reporting for CAMs and other information will likely become a reality in the United States within the next few years. n

Footnote 1. As an example of this type of expanded audit report (already required for registered companies in the UK), see KPMG’s six-page single spaced report accompanying the 2013 financial statements of Rolls Royce Holdings, PLC at www.rolls-royce.com/ Images/RR_Full%20Annual%20Report__tcm92-55530.pdf.

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

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Today’sCPA September/October 2014

TECH ISSUES This Tech Issues section replaces Emerging Issues

Cyber Incidents and Disclosure Controls

By Steven A. Harrast, Ph.D., and Debra McGilsky, Ph.D., Guest Columnists

pproximately 4 million Social Security numbers were stolen from an Illinois health care provider in July of last year. The data were not encrypted and could be accessed by anyone with a reasonable amount of computer expertise. According to reports, a class action lawsuit was opened.1 In September of last year, a London schoolboy was arrested for being part of the largest cyber attack ever perpetrated. Arrests were also made in other countries.2 This denial-of-service attack targeted a European not-for-profit dedicated to reducing spam on the Internet. Due to the increasing risk of cyber attack, the Securities and Exchange Commission (SEC) has provided guidance to financial professionals focused specifically on computers and data.3 While material losses due to cyber attack are uncommon,4 companies must have disclosure controls in place to ensure that even rare disclosures are adequate and complete. In the same guidance, the SEC highlights proper accounting practices for both internally developed, protection software and for concessions made to customers to continue a business relationship after a cyber incident.

Figure 1. 10-K Disclosures Using Cybersecurity Language

Cybersecurity Disclosures 2009 - 2013

796 10-K Disclosures

577

89 2009

122

2010

• Liability for stolen assets or information and repairing system damage that may have been caused. Remediation costs may include incentives offered to customers or other business partners in an effort to maintain the business relationships after an attack; • Increased cybersecurity-protection costs, including organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; • Lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; • Litigation; and • Reputational damage adversely affecting customer or investor confidence.6

The difficulty with monitoring cybersecurity events is that data can be compromised without the knowledge of the owner. In these cases, it may be much later when a breach is discovered. While best practices for monitoring are evolving over time, audit points would certainly involve password protection, the presence of monitoring software, encryption of confidential data, and a reporting process for breaches that ensures material items are incorporated appropriately into financial disclosures.

157

Disclosure Threshold

2011

The SEC suggests that cybersecurity risks and incidents that have effects that a “reasonable investor would consider important”7 be included in the annual 10-K disclosure. Specifically, the SEC suggests the following 10-K cyber-risk disclosures:

2012

2013

Fiscal Year

Increase in Disclosures Cybersecurity disclosures have risen rapidly in the last several years, increasing over 400 percent from 2011 to 2013. Figure 1 shows the increase in cybersecurity disclosures over five years; for 2013, 796 companies made cybersecurity disclosures.5 The percentage of companies making 10-K disclosures involving cybersecurity language has increased to about 5 percent of reporting companies. It is important to be aware of the circumstances that may require disclosure and to have the necessary controls in place so that cyber events are incorporated into the reporting process.

Cyber Events and the Reporting Process Because disclosures are generally dependent on materiality, which may change over time, reporting thresholds should be maintained 10

to ensure that appropriate cybersecurity events enter the reporting process. It can be very difficult to value the results of a cyber attack, since most of the assets affected can be intangible. According to the SEC, costs that should be considered when determining the materiality of a cyber attack include:

• Aspects of business that give rise to material cybersecurity risks and how these risks are addressed; • The extent of outsourcing functions that have cybersecurity risks; • Description of material cyber incidents; • Risks of cyber incidents that may go undetected; and • Discussion of relevant insurance coverage. 8

Issuers should avoid making disclosures of risks that could apply to any company.9 However, despite this admonition of the SEC, there are still many boilerplate disclosures of risk in 10-K filings, so disclosure is clearly the safe option when in doubt. The location of disclosures in the 10-K depends on the type and magnitude of the risk. This is best determined in consultation with disclosure experts. The purpose of this article is to create an informed financial professional, not to take the place of professional Today’sCPA

counsel. Financial executives need to develop a level of comfort with disclosures as part of their professional responsibilities. Depending on their position, they may be required to sign a Sarbanes-Oxley §302 certification. Knowing or believing that disclosures are adequate can make these certifications much easier to sign. Major cybersecurity incidents, which are extremely rare, may require filing an 8-K for U.S. domiciled companies or a 6-K for foreign private issuers. In 2013, there were no companies that filed an 8-K report specifically citing a material cyber incident as the reason for the 8-K. Again, while these events are rare, disclosure controls must be in place to ensure disclosures are made when appropriate.

Attack Costs and Probabilities What might trigger disclosure of a potential or actual cyber attack? The SEC suggests an analysis of the potential costs multiplied by the probability of occurrence. Clearly, if the attack has occurred, the probability of the attack can be set to one and the potential costs estimated. Cost estimation is by no means a well-worn path. Estimates of future losses may begin with an analysis of the most significant revenue producing activities and a determination of how a breach or interruption due to a cyber attack reduces revenues or creates costs. An analysis of insurance coverage may also be necessary to determine probable losses. The probability of a cyber attack is more difficult to determine and leads to a discussion of the inherent vulnerability of systems; it only takes one successful attack to create significant damage. So, how does one judge the probability of a successful attack? Unfortunately, there is no standard formula. Many companies are making boilerplate disclosures about potential losses from cyber attacks. To provide some shelter, and recognizing that cyber attacks are not going away any time soon, we suggest that a company consider its own history with attacks or the experience of other companies in similar circumstances to determine probability.

Remediation

by the target of attacks are nonexistent in 10-K filings.10 Despite the absence of legal disclosures, material legal proceedings are a required 10-K disclosure. Therefore, disclosure controls must consider material legal proceedings.

Software Development Costs Costs to develop internal software to prevent cyber incidents are addressed by ASC 350-40, Internal-Use Software. Circumstances may require consulting accounting standards, but in general, the costs of software purchased, modified or developed for internal use is capitalized once funding is committed and it is probable that the project will be completed and the software will be used for its intended function. If the software requires modification or configuration before use, the internal costs of programming are capitalized, as well as the costs of the purchased software. However, once the software is ready for its intended use, capitalization ceases and maintenance costs are expensed as incurred. Upgrades are generally capitalized. Software that is licensed for use is treated as a leased asset under ASC 840.

A Growing Threat Although many companies have sophisticated protection programs, there are still a number of instances of sensitive data being lost or stolen. Significant financial losses due to cyber attacks are very rare, however, according to a review of disclosures. As the threat of cyber attack grows, it is important to ensure that disclosure controls are in place to monitor and detect attacks that may require inclusion in public filings. n

Footnotes 1. “Advocate Health Slapped with Lawsuit after Massive Data Breach,” Healthcare IT News (2013) Available: www.healthcareitnews.com/news/AdvocateHealth-slappedwith-lawsuit-after-massive-data-breach. 2. “London Schoolboy Secretly Arrested over World’s Biggest Cyber Attack,” London Evening Standard (2013) Available: www.standard.co.uk/news/crime/londonschoolboy-secretly-arrested-over-worlds-biggest-cyber-attack-8840766.html.

Once a cyber-breach occurs, a company may provide incentives to maintain business relationships. According to SEC guidance, these should be accounted for under Accounting Standards Codification (ASC) 605-50, Customer Payments and Incentives. Cyber incidents may also trigger impairment of assets like goodwill, or other customer-related assets that were compromised or damaged in the cyber incident. Material cyber events that occur post balance sheet, but prior to the issuance of the financial statements, should follow the disclosure guidelines for subsequent events. Specifically, the nature of the event and an estimate of the financial effect should be disclosed or a statement included that an estimate cannot be made.

3. U.S. Securities and Exchange Commission Corporation Finance Disclosure Guidance:

Legal Proceedings

9. Item 503(c), Regulation S-K

The SEC mentions that material legal proceedings involving cyber incidents should also be disclosed. Nonetheless, disclosure of liabilities

10. Based on a review of the legal proceedings contained in 10-K disclosures for a one-

Topic No. 2, Cybersecurity, Oct. 13, 2011. 4. 12 months of 8-K disclosures did not contain any material losses due to cyber incidents. Based on a Lexis/Nexis query conducted on Nov. 21, 2013. 5. 10-K reports received by Lexis-Nexis within the fiscal year ended Nov. 26, 2013. 6. U.S. Securities and Exchange Commission Corporation Finance Disclosure Guidance: Topic No. 2, Cybersecurity, Oct. 13, 2011. 7. Basic v. Levinson, 485 U.S. 224 (1988); and TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976) 8. U.S. Securities and Exchange Commission Corporation Finance Disclosure Guidance: Topic No. 2, Cybersecurity, Oct. 13, 2011.

year period ending in November 2013.

Steven A. Harrast, Ph.D.

is a professor of Accounting at Central Michigan University. He may be reached at Steven.Harrast@cmich.edu.

Debra McGilsky, Ph.D.

is a professor of Accounting at Central Michigan University. She may be reached at Mcgil1da@cmich.edu.

Today’sCPA September/October 2014

CHAPTERS

2013-2014 Outstanding Chapter Awards

By Rhonda Ledbetter | TSCPA Chapter Relations Representative

o inspire chapters in their continuing effort to better serve members, TSCPA bestows Outstanding Chapter Awards to the small and medium-sized chapters. Selection is made by a group of past presidents from chapters of all sizes, who understand the work involved in successfully leading volunteers. Following is information about the chapters honored for the 2013-2014 year.

Outstanding Small Chapter: Brazos Valley President: Rodney J. Horrell, CPA The chapter’s extensive membership outreach program during the year was initiated as a more direct approach to fight an unfavorable historical trend of membership decline. It included sharing the benefits of membership when making phone calls to 100 percent of their non-renewing members. Another project was implementation of a faculty and staff network with Texas A&M University, producing 12 percent membership growth from that segment. The overall result of the chapter’s various initiatives was the most significant membership growth in the past seven years. A goal of enhanced Political Action Committee (PAC) participation was reached through a combination of targeted approaches. One was the creation of an award to recognize the top donor for the year. Another was an outreach campaign wherein select members were contacted; that generated a 31 percent increase in members making donations. The year-end result was a significant increase in the percentage of members participating in the PAC. Extensive work was done to ensure continuity as the longtime executive director prepared to retire and a replacement was hired. Chapter leaders conducted a formal benchmarking of the executive director’s salary compared to other small chapters, and documented the roles and responsibilities for the position. 12

Outstanding Medium-sized Chapter: El Paso President: Teri Reinert, CPA To enhance its appeal to members in business and industry, the chapter offered a tour of city water treatment plant facilities and a management-skills continuing professional education (CPE) presentation on relationship building. The fourth CFO of the Year Award was presented and a free year of TSCPA membership plus 16 hours of chapter CPE were given. Board members were given tours of the El Paso branch of the Federal Reserve Bank and the new Chihuahuas baseball stadium facilities in connection with meetings held there. The chapter renewed its tradition of hosting a two-hour call-in program on the local PBS station in January. The show consisted of 12 CPAs on a phone bank taking questions from viewers and three CPA panelists who answered questions on-air with the moderator. Collectively, the CPA volunteers answered more than 225 tax-related questions. The chapter solicited sponsorships for the show, which covered most of the cost. As a new project, the chapter sponsored a scholarship gift to the University of Texas at El Paso, in the amount of $2,520, to cover the registration fees for 18 Beta Alpha Psi students to attend the national competition. The BAP chapter received two second-place awards among 300 chapters in the national event. Help Make Your Chapter Award-Winning Members are the key to – and the reason for – chapter success. Contact your local president or executive director and find out how you can get involved in making yours an award-winning chapter! You can get contact information through the TSCPA website at tscpa.org. n Today’sCPA

GR WTH It’s what CGMA stands for. Officially, of course, it’s Chartered Global Management Accountant. A new designation representing accomplished professionals that drive and deliver business success, worldwide.

Find out more at cgma.org

SPOTLIGHT ON CPAS

Wheels of Justice Houston CPA Recruits Participants and Bicycles Across Rwanda By Anne McDonald Davis

avid Chaney’s recent 200-mile charity bicycle ride across Rwanda was part of a longer personal journey. He recalls: “In college, I had a strong desire to join the Peace Corps. A classmate did it … and I was inspired. That’s how far back this idea of volunteering abroad goes for me.” The son of an Arlington, Texas, CPA, Chaney ended up taking the long way around before heading overseas. “Dad is a solo practitioner like me, and he would have me do general ledger data entry on his IBM 8080 PC when I was in junior high. I was probably the only 12-year-old who knew what depreciation was,” he chuckles. After attending high school at the Marine Military Academy in Harlingen, Chaney decided the military wasn’t a long-term fit, despite previous interest in attending the Naval Academy, as his father had been a graduate and his grandfather a career naval officer. Instead, after winning the Texas valedictorian scholarship for his high school, Chaney headed for the University of Texas at Austin; majoring in accounting was something of a foregone conclusion. Still, that dream of making a Peace-Corps-type contribution lingered in the back of his mind. By the time he was in his mid-30s, Chaney had his own practice and a supportive wife. So he finally acted on his long-held ideals. After initially volunteering in Uganda and Kenya, in 2010 he discovered the Survivors Fund in Rwanda, a British non-governmental organization (NGO) that needed someone to help the staff with financial statements, teaching them proper accounting techniques and how to use QuickBooks. Chaney speaks soberly of the 1994 genocide of 1 million Rwandans, which left more than 400,000 survivors struggling in its wake, mostly widows and orphans: “No one seems to have cared about them much since. It’s so sad. I just want to help raise awareness for their plight.” In 2011, Chaney became a trustee of the organization and now assists in overseeing the finances for various ongoing grants and programs with an annual budget of about $1.5 million. That year, he decided to also tackle another personal goal. “I weighed 320 pounds,” Chaney explains. “So I made a pledge – to get back down to 200 pounds by my 40th birthday in 2014.” After a year of Weight Watchers and cycling, the Houston CPA had reached 260, where he felt like he was “stuck.” That’s when he conceived the idea of organizing a bicycle ride across the challenging Rwandan terrain in recognition of the 20th anniversary of the tragedy. He muses, “I’d ridden for bicycle charities in Houston so I knew … Rwanda is a mountainous country and I would not be able to cycle across it unless I lost that last 60 pounds, which I did last summer.” 14

Today’sCPA

Chaney’s group of three bicyclists left Gisenyi on June 19, 2014, and rode about 35 miles on the first day to Musanze. They continued on about 60 miles each day, passing through Kigali and ending their trip at Rusumo Falls, near the Tanzania border. Mountains rising up to 8,000 feet were traversed before they crossed the finish line.

Making the Climb In light of his professional and personal experiences, what advice does Chaney have for the next generation of CPAs? “Starting with school … grades are important, but they aren’t the most important thing,” he opines. “A strong work ethic is much more important. I would much rather hire someone who spent four hours a night for a week studying for a test and got a ‘B’ on it rather than someone who didn’t open a book and got an ‘A.’ Grades open the door to your first job. Hard work gets you up the staircase waiting behind it.” Chaney says his father instilled his work ethic, encouraging him to take jobs as a teen. “Working at the car wash and digging ditches in the Texas summer,” he grimaces with a grin. Chaney also encourages volunteerism, both charitable and professional: “I think TSCPA is an excellent resource for CPAs and aspiring CPAs. Volunteering with TSCPA is a great opportunity to network, broaden your skill set, and give back to the community and profession.” Married for 10 years, the Houston CPA enjoys sharing life with his wife, Tanya, their seven-year-old daughter, Mia, and four-year-old son, Dylan. When not working at his practice, taking care of family or volunteering in Rwanda, he is now training for his next challenge – triathlons. He also continues to be involved with a number of bicycle charities, including the National Multiple Sclerosis Society’s Houston-to-Austin bicycle ride and Bike Houston, a bicycle advocacy/safety group representing all city bicyclists. His philosophy on life? “You can judge someone’s character by the way they treat the person who can do nothing for them.” n

Want to Help?

To learn more or donate, please visit www.rideforthesurvivors.com. The small team of cyclists has so far raised over $33,000 for Survivors Fund, a British nonprofit that assists Rwandan genocide survivors. All U.S. donations go through the Charities Aid Foundation of America, which will allow your donation to be tax deductible.

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TAKE NOTE Continuing Professional Education at Your Fingertips Take advantage of TSCPA’s CPE offerings throughout the year. Whether you prefer a four-hour webcast or two-day conference, TSCPA gives you a variety of options to receive your continuing education. Visit the CPE section of the website at tscpa.org and you’ll find a searchable course catalog, listings for all live programs across the state, access to online, self-study programs, links to webcasts and webinars, and much more. As a member benefit, TSCPA wants to make it as easy as possible for you to receive the quality education you need. n

Need an Answer? Ask a Member! TSCPA’s Ask a Member program is an important benefit of your TSCPA membership. This easy-to-use resource allows you to access the vast wealth of knowledge of your fellow 27,000-member Texas CPA network. Whether you are assisting a client outside your area of expertise, are considering a new venture, or have a management accounting issue or concern, Ask a Member volunteers provide quick, informal assistance on an “as-needed” basis, via phone or email. Go to the Resource Center on the website at tscpa.org and click on Ask a Member. n

Succession Planning Resource for TSCPA Members TSCPA offers members resources that are focused on firm management and practice management issues. The Practice Management Institute was developed in partnership with the Succession Institute, LLC. Members can access free material and content on succession planning. There are also CPE self-study course offerings available at a discounted rate for those who would like to receive CPE credit. To learn more and utilize this members-only resource, please go to the CPE section of the TSCPA website at tscpa.org, scroll down and select Practice Management under Tools and Information. n

Disciplinary Actions As a result of decisions by a hearing panel of the Joint Trial Board, the following members had their TSCPA membership expelled: • David M. Boatright of Corpus Christi was found guilty of violating Rule 501–Act Discreditable of the AICPA Code of Professional Conduct as adopted by TSCPA’s Code of Professional Ethics for failure to comply with the directives of a hearing panel of the Joint Trial Board. The expulsion was effective June 15, 2014. • James G. Bounds of Austin was found guilty of violating TSCPA Bylaw Article III, Section (8)(d) and AICPA Bylaw 7.4.6 for failure to cooperate with the Professional Ethics Committee in an investigation. He was expelled from TSCPA and AICPA, effective June 15, 2014. • Robert M. Woodard of Waco was found guilty of violating TSCPA Bylaw Article III, Section (8)(d) and AICPA Bylaw 7.4.6 for failure to cooperate with the Professional Ethics Committee in an investigation. He was expelled from TSCPA and AICPA, effective June 15, 2014. n

Volunteers Needed for ACAN Program TSCPA’s Accountants Confidential Assistance Network (ACAN) program is dedicated to helping Texas CPAs, CPA candidates and accounting students who are addressing alcohol, chemical dependency or mental health issues. The Texas State Board of Public Accountancy has asked TSCPA to assist a number of CPA candidates around the state as an aspect of the ACAN program. If you are a friend of Bill Wilson or wish to be a friend of our profession, this is an opportunity to help. Please contact Craig Nauta at 800-428-0272, ext. 238; 972-687-8538 in Dallas; or at cnauta@tscpa.net. n

Submit an Article to Today’s CPA Would you like to see your name in print? The editors of Today’s CPA are practitioners. To submit an article for consideration or to learn more, please seeking article submissions for the magazine. Today’s CPA is a peer-reviewed contact managing editor DeLynn Deakins at ddeakins@tscpa.net or technical publication with an editorial board consisting of highly respected CPA editor Bill Thomas at Bill_Thomas@baylor.edu. n 16

Today’sCPA

WHAT CAN YOU EXPECT

FROM TSCPA BESIDES Personal and Career Development Cutting-Edge Professional Information and CPE Enhancing the Image of the CPA Profession Recruiting New Members to the Profession Protecting the CPA Certificate You can expect special deals and discounts

Featured Member Benefit Radiate360 is an easy-to-use digital marketing platform that enables CPAs to manage their

web presence, social media accounts, business directory listings, online reputation and digital/mobile media campaigns – all within one interface. For more information, a demo or to set up a meeting, visit http://www.radiatemedia.com/tscpa, or contact Robert Hernandez at 866-825-9005 or Robert.Hernandez@RadiateMedia.com.

Pearl Insurance TSCPA has partnered with Pearl Insurance to offer the TSCPA Member Insurance Program. The program offers a variety of personal and professional insurance plans, including the TSCPA Private Health Care Exchange. Go to http://tscpainsure.org/.

Becker CPA Review Direct Bill Program Save $600 per staff member off the cost of the full four-part CPA review course. Contact tkimble@becker.com

CPA Exam Review Discounts

TSCPA Magazine Subscription Program

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

Discounts on magazine subscriptions 800-603-5602

InterCall

Texans Credit Union

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

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

CareerBank.com

Paychex Partner Program Payroll processing. 877-264-2615

ProPay

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

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Discounts on credit card processing 888-227-9856

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

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Discounts on computer and technical products 888-289-6424

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TSCPA Members’ Retirement Program – Members are waived $25 enrollment fee. 800-523-1125, www.axa2plan.com

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

Monroe Systems for Business Discounts on calculators and other supplies www.monroe-systems.com

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

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

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

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

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

UPS Shipping Save up to 36% on a broad portfolio of shipping services. www.savewithups.com/txscpa

Roger CPA Review Direct Billing Receive all the enrollment benefits associated with TSCPA membership and have the cost of the course billed to your firm. Visit the Member Benefits Marketplace at tscpa.org.

Liberty Mutual Homeowners and auto insurance ID Number: 7026. 800-524-9400

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

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

TAKE NOTE

Chartered Global Management Accountant (CGMA) Designation: Implementing an Effective Corporate Ethics Policy

By Tanya Barman and Samantha White

hen asked about their values, the vast majority of companies can provide a document they would describe as a code of ethics or conduct. However, research suggests a possible disconnect between companies’ stated intentions and the degree to which they truly value ethical behavior. Following are five steps that companies can take to ensure that their corporate ethics policy is effective and becomes embedded in the company culture. Also included are practical examples of the various ways organizations have accomplished this task.

in training sessions. For example, Stryker, a medical device producer, reviewed events that had taken place within its industry and built a set of fictionalized scenarios based on them. To provide context, Stryker created a hypothetical organization with a back story, mission and an organization chart. Employees were presented with a scenario based on this background and were asked to go through the company’s code of ethics to identify which of the standards were being broken in that case. After the discussion, it was revealed to participants that all of the scenarios had actually taken place in the sector in the past, helping to bring the training home.

1. Code of Ethics The essential elements of a code include assurances of support for the policies from organizational leadership, practical guidance on what is expected regarding ethical issues, commitments concerning stakeholder relationships, example Q&As, scenarios or decision trees, details of how the code will be implemented and monitored, and the consequences of misconduct. Signposts to further support, advice and other relevant policies should also be included.

4. Supporting Context and Culture This involves having the “ethical architecture” in place to support a living, breathing code. That architecture includes outlining policies and regulations in employee contracts and supplier agreements, identifying individuals and boards that are accountable for outcomes, creating ongoing awareness-raising programs, opening discussions with feedback, and having oversight and monitoring procedures in place. Taking action against wrongdoing and communicating the action taken to staff is an important element of this. More companies are including ethics-related criteria in performance reviews. For example, management accountants might be asked whether they challenged or raised and resolved an issue or an area of concern that could lead to fraud. For managers, does your team escalate issues and ask for clarification? Siemens’s strategy is to focus on bridging the communication gap between senior management and employees at the lower levels of the company. In the 2013 financial year, the company introduced “integrity dialogues” in which compliance refresher training is cascaded down through the company. Compliance officers provide training to the senior management of each business unit, who then train their own direct reports and so on. Individual operating units within the company enhance their training activities with additional topics that address challenges specific to them. In this ongoing part of the practice, leaders talk about integrity and explain how they themselves “walk the talk” in terms of how they do business. The dialogue is carried through to every sales meeting to bring about an open discussion on ethical issues and how they should be handled.

2. Communication and Awareness Campaigns This is a continuous process. Communication of a company’s ethics policy never ends. To engage employees and raise awareness of ethical decisionmaking, Cisco Systems created “Ethics Idol,” a cartoon parody of the reality television singing contest American Idol. In each episode, animated contestants sang about a particular ethical dilemma or situation, which was then commented on by a panel of judges. After watching the show on the company’s intranet, viewers were asked to vote on which of the judges had given the appropriate response to the situation. At the end of each section, the organization’s ethics officer revealed the correct answer based on official compliance standards. Research shows that most companies’ efforts tend to fail after step two. 3. Training and Reinforcement Most organizations now offer online anti-bribery training. On its own, this is not enough; companies shouldn’t be comforted by a check-the-box mentality. There is no substitute for face-toface, qualitative training with wider discussion and debate of understanding and practical application. Discussion of scenarios can help employees explore ethical issues 18

5. Monitoring and Accountability Effective speak-up arrangements, such as anonymous helplines, through which employees, contractors and other third parties can Today’sCPA

raise concerns in confidence about unsafe, unethical or unlawful practices are an important element of good corporate governance. A key component of these arrangements is that the staff feels comfortable that they can raise issues without fear of retribution. Some companies report the number and nature of queries raised internally to the board and executive committee, and include the information in company newsletters. Some provide a breakdown of the reports by country and as a percentage of the workforce. Enlightened companies now communicate internally about disciplinary actions taken when wrongdoing occurs. Some companies make this information public. Beverage company Diageo’s annual sustainability report details the number of suspected breaches of the company’s code of ethics (743 in 2013), how many of these were later substantiated (376) and whether they were reported through the speak-up hotline (242) or raised directly with a line manager or the compliance department, for example. The report also states that 116 people exited the business in 2013 as a result of breaches of the company’s code or policies. Reporting in this way provides evidence that the company has procedures in place that are actually used and are effective in managing ethical misconduct. According to the report, Diageo routinely shares examples of breaches that have recently occurred or testimonials from colleagues who were tempted to do the wrong thing yet made the right decision.

The Litmus Test The real litmus test of whether your ethics policy is working and embedded is if an employee feels comfortable enough to speak up if he/she has a concern and whether he/she believes the company will respond and, if need be, take appropriate action. Once an ethics policy is securely embedded in your company, you also have to take into account the wider value chain. Today’s complex and extended supply chain has significant implications for organizations’ ethical, governance and risk-management policies and practices. Therefore, it is advisable to conduct due diligence on new and existing suppliers alike, engaging them in ongoing discussions regarding your standards and contractual expectations. For example, to engage a supplier base spanning 70 countries, UKbased retailer Marks & Spencer holds regular face-to-face meetings with partners, as well as an annual conference. The company has a website where suppliers can access tools, guidance and incentives. Helping to raise standards and awareness through the chain is beneficial for everyone. After all, good companies keep good company. Ethical Management Checklist Here is a checklist of reflective questions for finance professionals relating to the management of ethics. It can be found in the Essential Tools for Management Accountants on the CGMA website at cgma. org. The questions serve as a foundation for reflection. CGMA designation holders must consider and comply with their employer’s policies, and ensure they uphold the code of conduct of the membership organization to which they belong. A CGMA designation holder who is a member of the American Institute Today’sCPA September/October 2014

of CPAs (AICPA) must comply with requirements set out in the AICPA Code of Professional Conduct, as well as any rules his/her state board of accountancy may have on the matter; Chartered Institute of Management Accountants (CIMA) members are required to uphold the CIMA Code of Ethics. Also see tinyurl.com/79u5qxp. 1. Does your organization have an ethical statement/code of conduct/code of ethics? If yes, does it reflect your professional obligations? 2. Does your organization currently communicate its ethical business practices and commitment to responsible business? If yes, how? 3. Are your statements for responsible business monitored and verified? If yes, how and by whom? 4. Does your organization include a session on ethics and responsible business in its induction program for all staff ? 5. Is this featured in ongoing training? 6. Are you aware of what categories of ethical information are gathered in your organization? If yes, are there any omissions? 7. Do you know who in your management team uses ethical data? Who else might benefit from using ethical data, and how do you work together? 8. Does your board/chief executive/CFO take responsibility for ethical performance? If no, what role should they take? 9. Are staff rewarded/disciplined in relation to ethical performance? 10. Is someone in the organization responsible for gathering or analyzing ethical performance information? 11. Does ethical data gathered within your organization help inform business decisions and business success? 12. Does your organization have an anti-bribery policy? If yes, is this policy promoted/enforced? How? 13. Does your organization have a whistleblower/speak-up line? If yes, how is it communicated, and how are reports acted upon? 14. Does your organization have an open-door policy between management and other employees to promote openness and transparency? 15. Do you feel confident that you and your team can maintain objectivity and integrity, as well as avoid conflicts of interest? What steps can you take to ensure you do? 16. Would you know what steps to take if you were asked to do something that challenges your ethical standards? 17. Have you undertaken professional development to improve your skills in gathering, understanding and using nonfinancial information to benefit your organization? If yes, what other professional development in regard to ethical performance would you benefit from? This article first appeared in the June issue of CGMA Magazine. For more articles, sign up for the weekly email update from CGMA Magazine at http://bit.ly/UZ07NC. Copyright © 2011-2014 American Institute of CPAs. Copyright © 2011-2014 Chartered Institute of Management Accountants. All rights reserved. n 19

TAKE NOTE

TSCPA Annual Meeting of Members

By Rhonda Ledbetter, TSCPA Chapter Relations Representative

SCPA members, families and colleagues gathered in Santa Fe, New Mexico, for the 2014 Annual Meeting of Members and Board of Directors Meeting. Participants enjoyed a variety of activities at the meeting site, Hilton Buffalo Thunder, and the many attractions in the area.

Year in Review Immediate Past Chairman Willie Hornberger, CPA-Dallas, shared the exciting things he sees happening with the accounting profession and TSCPA. He talked about the Society as a thriving organization that commands respect around the state and across the country. Its strength comes from members – past and present – who don’t give up on making tough choices. It is crucial to take no shortcuts and to refuse to compromise on values. The CPA certificate is precious because of the integrity it represents. Hornberger stated that young people look to the members of TSCPA as examples of what it means to work for the greater good. The profession seeks the next generation of CPAs who can lead it through a demanding environment. For details about a wealth of the Society’s projects working toward these goals, please refer to the “Year in Review” article in the May/June issue of Today’s CPA. AICPA American Institute of CPAs Vice Chairman Tommye Barie, CPA, discussed issues and initiatives the Institute is dealing with at the national level. She indicated that CPAs are first among financial professionals in positive perception by business decision-makers. The services they provide instill confidence. Because of the high demand for the credential and the high standards required to obtain and maintain it, there’s currently a competitive marketplace for employing CPAs. Those who will be able to make the most of the opportunities have business acumen along with decision-making and communications skills. She touched on developments in financial reporting. There are changes related to assurance services. Proposed compilation and preparation SSARSs would result in a bright line between accounting (preparation) and reporting (compilation) services. The Uniform Accountancy Act’s definition of attest has been updated. The Private Company Council (PCC) has worked with the Financial Accounting Standards Board (FASB) to develop a guide that provides considerations for the PCC and the board in making user-relevance and cost-benefit evaluations for private companies under the existing conceptual framework. Barrie then moved into reporting ways AICPA supports CPAs. One is issuance of the Chartered Global Management Accountant (CGMA) designation. It includes a competency framework to help CPAs know the skills that will help them be more successful and to embrace lifelong learning. It also provides a way to benchmark a company’s business finance function against others. 20

Emerging issues in the profession include complexity in business and underlying standards, pace of change, continued audit relevance, peer review, regulators’ scrutiny and expanding services. AICPA has a two-phased approach to enhancing quality. The near-term list of actions includes examining professional standards for audits and suggesting changes where appropriate; new resources and tools; and enhancements to the current peer review program. A long-term project will be practice monitoring of the future. That will require leveraging technology to make it more real-time and continuous, as well as transparent and useful. A topic Barrie is especially passionate about is the future of learning. An AICPA task force has examined and discussed lifelong learning for a new generation. The primary recommendations are: • Innovate and Experiment • Ignite a Passion for Learning • Make Learning Personal • Measure What Matters To learn more, visit futureoflearning.aicpa.org.

Profession Issues A panel of TSCPA volunteer leaders discussed some of the developments in a forecast for the accounting profession recently presented to AICPA. Panel members were Allyson Baumeister, CPA-Fort Worth; Jim Reeves, CPA-Fort Worth; Bill Schneider, CPA-Dallas; and Carol Warley, CPA-Houston. The moderator was TSCPA’s Executive Director/ CEO John Sharbaugh, CAE. The first trend addressed was demand for CPA services as those in all fields take on a more strategic role. Schneider said: “CPAs must serve their clients (which include employers) by understanding the standards for nonfinancial metrics. Accountants analyze big data every day to obtain useful information; to stay in demand, they have to take it beyond just the dollars and build strategic relationships to implement what’s learned from the data.” It was stated that CPAs and their firms must make a deep dive into niche areas, packaging and marketing their services to meet market demand. There might be times when merging with another firm allows CPAs in public practice to serve clients’ increasingly sophisticated needs. It was commented that, like the rest of the business world, the accounting profession experiences ebbs and flows in demand. Public practitioners and industry CPAs alike have to be able to effectively leverage technology and harness massive amounts of data in a learning environment. Reeves said: “Accounting organizations must enable ever-more specialized learning, provided to smaller groups, and partner with online providers to get on their platforms. Eventually, we may see a convergence of what we think of today as CPE and research.” It was stated that if CPAs aren’t learning every day, they’re behind. Today’sCPA

TSCPA’s 2014-2015 Chairman Mark Lee, CPA-Houston; AICPA Vice Chairman Tommye Barie, CPA; and TSCPA CEO/Executive Director John Sharbaugh, CAE.

Another trend on the group’s radar is the battle for talent. As a significant number of those in the profession are reaching their 60s, there is a need to rethink traditional retirement, as well as to bring in the younger workers who will take on the bulk of the work. It was agreed that older workers are experiencing changing dynamics. Because of dramatic changes in longevity, most are not ready to stop working entirely. Employers need to keep them because of their knowledge and experience. They have usually made their mark and can be happy to step back and let the next generation take charge, finding satisfaction in working on specific projects and being free of supervisory responsibilities. That led into a suggestion that employers should hire only new workers who show management potential and then move them through the upward path more quickly than in the past. Warley said: “Employers must adapt to generational differences, with tools such as flexible work arrangements. Younger workers should be mentored extensively along the way and given leadership training, but then must be allowed to truly lead.” Another panelist commented that flexible work arrangements imply trust, which drives employee engagement and leads to better retention because of a feeling that the employer really cares. The trend identified as technological disruption was examined, specifically how the cost/benefit ratio plays out for companies. Baumeister said: “We’re doing more with less, but there are costs to that. During the last 10 years, we have implemented dramatic change. We’re paperless, work offsite, use portals for secure data transfer, and Skype with our clients. The key is to manage their expectations, especially regarding the speed of our work product.” Another panelist commented that technology has developed the assumption that people are available 24/7, which can be a negative. A key issue is how to organize a workforce around changing technology. People must manage by outcome – identifying what a project should accomplish – and not with traditional measures such as time worked. Technology is simply a tool. It was recommended that CPAs should be looking five years into the future and considering how their employers will use technology then. Increasing regulatory complexity was another trend discussed. It was stated that it is pervasive through the business world, affecting not just CPAs, but clients in their respective fields. All worry Today’sCPA September/October 2014

Panel moderator John Sharbaugh, CAE, with panelists Allyson Baumeister, CPAFort Worth; Bill Schneider, CPA-Dallas; Carol Warley, CPA-Houston; and Jim Reeves, CPA-Fort Worth.

about what they might be missing. One approach is to divide and conquer: assign staff members to research key topic areas and keep their group up to speed. It was agreed that the profession must be involved and use its voice when regulations become overwhelming.

Accounting Education Foundation The President of the Accounting Education Foundation (AEF) Board of Trustees John Misitigh, CPA-Houston, presented an update on the work of the Foundation to provide financial assistance to students who are preparing for a career in accounting. During the 2013-14 fiscal year, the Foundation granted $115,000 in $2,500 scholarships to students at 43 Texas universities. It gave $10,000 to the AICPA Minority Scholarship Program, which funded 13 Texas students. The Kenneth W. Hurst Fellows Award is given to those who contributed outstanding service or given at least $5,000 to the AEF during the most recent five years. Presentation of the award was made to Fred Timmons, CPA-San Antonio. The Foundation is kicking off a $100,000 challenge for the TSCPA centennial year. Look for more information to come in Society communications. Business Matters 2013-2014 Treasurer Jeannette Smith, CPA-Rio Grande Valley, presented the year-end financial report, which can be viewed at tscpa.org. 2014-2015 Treasurer Jim Oliver, CPA-San Antonio, presented the new fiscal year budget, which was approved. Business conducted for other TSCPA entities included: • election of directors of the Accountancy Museum of the Texas Society of CPAs, Inc., • the annual meeting of the TSCPA CPE Foundation; and • the annual meeting of the Peer Assistance Foundation. Planning for the New Year 2014-2015 Chairman Mark Lee, CPA-Houston, called upon members to “be a part of something bigger than yourself.” With honesty and integrity, CPAs will uphold the high standards of the profession. continued on next page 21

TAKE NOTE continued from previous page He stated that being part of something bigger fosters lifelong involvement. TSCPA provides the opportunity to be involved and network with 27,000 very smart people. Read more about these and other exciting ideas at tscpa.org and in the Chairman’s and Executive Director’s Message in the July/August issue of Today’s CPA magazine.

Strategic Planning The process of developing the new TSCPA strategic plan, which took place over several months and involved a variety of groups, has been completed. At the meeting, Michael Brown, CPA-Central Texas, shared the five objectives and some of the thinking behind each one. The strategic plan is spotlighted in the Chairman’s and Executive Director’s Message in this magazine and is at tscpa.org. Corpus Christi Chapter members Jeff Smith, CPA; Jerry Spence, CPA; Diane DeCou, CPA; David Morales, CPA; and Susie Sullivan, CPA.

He reminded the group of the power of numbers and how the collective voice of 27,000 is stronger than that of one individual – but that the accounting profession is also diverse. Lee stated that the Texas economy is on fire. He presented information about jobs, housing, exports, taxes, and consumer confidence. He also talked about growth in the number of accounting graduates and CPA firm new hires, and demand for the CPA credential.

Outstanding Chapter Awards, Speakers’ Presentations and Future Site Please see the Chapters column in this issue for information about the recipients of the Outstanding Chapter Awards, which were presented at the meeting. You can view speakers’ PowerPoint presentations through the TSCPA website, at tscpa.org. Dallas is the site for the 2015 Annual Meeting of Members and Board of Directors Meeting, June 26-27, which will include a celebration of TSCPA’s centennial. n

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Chapter Challenge Golf Tournament The winning teams are listed in order by score, starting with first place. Fort Worth Chapter – Steve Newcom Panhandle Chapter – Mike Young Houston Chapter – Jean and Bill Frazer, Brian Jones, Mark Lee, Stephen Parker, Nancy and Dick Rutledge Brazos Valley Chapter – Toni and Thad Joyner Austin Chapter – Jesse Dominquez, Steve Joiner, Matt Malcom, Joyce and Rick Smith, Donna and Steve Wesling Dallas Chapter – John Eads, Hank Pearson, Richard Sowan, Justin Watson Central Texas Chapter – Twila and Alton Thiele San Antonio Chapter – Jim Oliver, Fred Timmons

for dates, times, and online registration Sponsored by the Texas Extension Education Foundation, Inc

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TSCPA 2013-14 Award Recipients Mack Lawhon, CPA-Fort Worth, was recognized for Meritorious Service to the Accounting Profession in Texas. This award is regarded as the highest honor bestowed by TSCPA, given for leadership and service. Lawhon has been a TSCPA member since 1972 and has served the Society, his chapter, and the profession in a variety of roles. They include service on TSCPA committees and a term on the Executive Board and Board of Directors, as well as presidency of his chapter. He has also been a member of the AICPA Council. Lawhon serves the profession as a trustee of the Financial Accounting Foundation. Nathan Cross, CPA-Southeast Texas, was given the Distinguished Public Service award. The recipient for this recognition is selected based on outstanding charitable, community and/or civic activities and other public service unrelated to the regular duties performed as a TSCPA member. He is a veteran of the United States Army, serving in active duty and as a reservist. Cross has served as chairman of the Board of Directors for the Greater Beaumont Chamber of Commerce and as president for the Samaritan Counseling Service of Southeast Texas. He is a civilian advisory member on the Beaumont Firemen’s Relief and Retirement Fund pension committee. In addition, he is a board member and treasurer of the Beaumont Public Schools Foundation, and has been on the board of the Baptist Hospital of Southeast Texas and other professional, charitable and civic organizations. Penny Dear, CPA-Austin, and Donna Hugly, CPA-Dallas, were elected as Honorary Fellows. Included in the criteria to be considered is leadership in TSCPA on a consistent basis for a number of years. Each has served on various Society committees and on the Executive Board, and many years

Executive Board 2014-2015

on the Board of Directors. Dear has been a recognized leader with a special dedication to the governmental affairs of TSCPA and representing the interests of Texas CPAs. Hugly is an appointee to the Texas State Board of Public Accountancy and has served on the AICPA Council. Ben Simiskey, CPA-Houston, was named Young CPA of the Year. This award recognizes a CPA who is age 39 or under, and who has made significant contributions to the accounting profession and the community. Simiskey’s volunteer service to TSCPA and his chapter includes service on his chapter’s Board of Directors and various local committees, a seat on TSCPA’s Strategic Planning Committee, and a term as chair of the Young CPAs and Emerging Professionals Committee. Carol Warley, CPA-Houston, received the award for Outstanding Committee Chair. She has served on the Federal Tax Policy Committee since 2009 and as chair since 2013. Under Warley’s direction, the committee has issued 18 comment letters to regulatory bodies and strengthened their communication efforts to keep members informed of their work. Through her leadership, this committee continues to work tirelessly to represent Texas CPAs.

Mark Lee, CPA-Houston Chairman

Special Recognition Awards The Special Recognition Award is presented by the TSCPA chairman to honor members who have performed an extraordinary service to the Society in a given year. Paul Damerow, CPA-Corpus Christi Phil Davis, CPA-Permian Basin Dora Jean Dyson, CPA-Central Texas Chris Janecek, CPA-Victoria Charlotte Jungen, CPA-Houston Barry Wilken, CPA-Houston n

Jerry Spence, CPA-Corpus Christi

Allyson Baumeister, CPA-Fort Worth Chairman-elect Jim Oliver, CPA-San Antonio Treasurer Roxie Samaniego, CPA-El Paso Treasurer-elect Melanie Geist, CPA-San Antonio Secretary Michael Brown, CPA-Central Texas David Colmenero, CPA-Dallas Randy Crews, CPA-Rio Grande Valley Kathy Kapka, CPA-East Texas Billy Kelley, CPA-Permian Basin Toni McBee Joyner, CPA-Brazos Valley Christi Mondrik, CPA-Austin

Susan Jistel Spillios, CPA-Houston Willie Hornberger, CPA-Dallas Immediate Past Chairman John Sharbaugh, CAE Executive Director/CEO

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 – Austin Medium-sized Chapter – Central Texas Small Chapter – Corpus Christi Today’sCPA September/October 2014

Highest Percent Increase in Members Contributing Large Chapter – Austin Medium-sized Chapter – South Plains Small Chapter – Brazos Valley

n 23

CAPITOL INTEREST

What’s Up for the Next Session?

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

n Tuesday, Jan. 13, 2015, the 84th session of the Texas Legislature will convene to adopt a budget for the 2015-16 biennium and to pass whatever other laws can be crammed into the 140 days before sine die on June 1, 2014. Since the Texas Legislature only meets in odd-numbered years for 140 days, those days are jam-packed with between 5,000 and 6,000 bills filed by legislators that can affect your life and mine. While the appropriations bill is the only one the legislators must pass, rest assured they will pass a lot more. While it’s fairly clear what topics will be addressed during the 2015 session, even the most intrepid forecasters are hesitant to say what will actually pass into law. Following is the subject matter list for 2015. Budget – Texas will have a large surplus, money to spend up to a point. The state will have more money to spend than the constitution allows to be spent, without a vote by the Legislature to exceed the constitutional spending cap. This will be a hard vote for many legislators to make. Higher than anticipated Medicaid spending may mean there will be a vote to exceed the budget cap, even for the current biennium. At the same time, some will be proposing a constitutional amendment to lower the spending cap. Despite being flush, some legislators are predicting a special session before the budget will be complete, perhaps because of education issues. Education – Lawsuits are still unresolved and unlikely to be resolved before the session. This uncertainty will cloud the budget negotiations. Education issues other than budget will be actively discussed, including school choice (vouchers) and charter schools. There is always much discussion about charter schools, despite the fact that only about 4 percent of Texas students (200,000) attend the 552 charter schools in the state, but there is a waiting list of another 100,000 students. Roads – If voters in November pass the constitutional amendment transferring $1.7 billion from the Rainy Day Fund to a revolving road debt repayment plan, budget negotiations will be easier, but TxDot says they need an additional $4 billion per year and the state has maxed out its road debit limit. Attorney General and gubernatorial candidate Greg Abbott promises to fix the roads with no new taxes and no new toll roads – a bold promise. Water – Last November, voters agreed to transfer $2 billion from the Rainy Day Fund to a revolving water financing authority. This is a good first step, but only that. Forecasters say the water problem is about a $40 billion long-term issue. Immigration/border security – Many legislators and statewide office holders campaigned on improving border security. It’s still not clear exactly what the state can do, but Abbott proposes doubling the Department of Public Safety budget to be used for border security. Proposals to deny in-state tuition to undocumented Texas schoolchildren will be front and center. Those who support the move see it as immigration control; those who oppose it see it as an education issue. Bob Owen, CPA 24

Guns – Open carry, campus carry and just about any other kind of carry you can imagine will be proposed. Last session saw an entire day devoted to gun legislation – two days this session? Taxes – With budget surpluses, taxpayers should be safe from new or increased taxes. Many candidates are proposing tax reductions, but specifics are in short supply. The franchise tax is already slated to continue last year’s rate cut for another year. There is also a lot of interest in property taxes, with a strong campaign to supposedly level the playing field between homeowners and commercial property owners. The Texas Taxpayers and Research Association recently published a white paper to prove that homeowners were not subsidizing business property owners. Social issues – Marriage, abortion, etc. will still be high profile, despite the judicial trend to declare most gay marriage bans unconstitutional. Job creation – Some are questioning if the government should be providing incentives for businesses to move to Texas, arguing that businesses will make the move with or without such assistance. There is a select House committee chaired by CPA and TSCPA member Rep. Angie Chen Button (R-Garland) studying the issue right now. Streamlined and transparent government – Expect legislation for more government transparency, especially for local governments. Abbott has a proposal to streamline occupational licensing. It’s not supposed to apply to professions like CPAs, but it will bear watching as legislation is introduced. Health care – Evidently few people in Texas like the Affordable Care Act, usually referred to as “Obamacare” in Texas political circles, but the state’s cost of Medicaid and other health-related social services are growing faster than general inflation. It will need to be addressed at some point and it may start this session. That’s what’s up for the next session, in general. What will be on TSCPA’s agenda? That’s in the making. Watch for details in the next Capitol Interest article. n

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

CPAs Running for Office

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

PAs in Texas are not only active in supporting candidates for election, some are actually serving in or seeking public office. CPAs are good for government. They understand finances, budgets and taxes. CPAs typically get into the details; they have an inherent drive to understand the financial implications of legislation. Texas is fortunate to already have one TSCPA member serving in Congress and four TSCPA members serving in the state Legislature. The four are incumbents and three are running for reelection, while one is running in a special election for the state Senate. Two of the CPA legislators do not have a major party opponent in the November general election, so they will continue to serve. One current CPA House member does have an opponent in the November election. Here’s a rundown on these CPAs willing to share their talents with the public.

Rep. Mike Conaway (R-Midland); Congressional District 11 Conaway is serving his fifth term in Congress and is well known to TSCPA members, having been a frequent speaker at TSCPA’s Annual Meetings. Before being elected to Congress, he served as chairman of both the National Association of State Boards of Accountancy and Texas State Board of Public Accountancy. Conaway’s Texas Congressional District includes Midland, Odessa, San Angelo and 29 Texas counties. He currently serves as the chairman of the House Ethics Committee and as a member of the House Agriculture, Armed Services and the Permanent Select Committee on Intelligence committees. He also serves as Deputy Republican Whip and has helped organize a CPA caucus among congressional members. Conaway has earned the reputation as “a voice of reason” in Washington, D.C. His background as a CPA and profession leader has given him the credibility to be a vocal proponent of fiscal responsibility in government. Conaway has won his previous election campaigns by substantial margins. He faces only a Libertarian opponent in the November general election. Rep. Angie Chen Button (R-Garland); House District 112 Button is serving her third term in the House. She serves as chair of the House Select Committee on Economic Development. She is also the vice-chair of the Technology Committee, sits on the powerful House Calendars Committee and is a member of the Ways and Means Committee, the tax writing House committee (a good place for a CPA). Button is a marketing manager for Texas Instruments, where she promotes American products internationally. She has been an effective legislator, already receiving recognition from a number of organizations, such as the Championship for Free Enterprise award from the Texas Association of Business and the Taxpayers’ Advocate award from Texans for Fiscal Responsibility. Button has been responsive to TSCPA’s issues from the beginning of her legislative service. She has no opponent in the November general election. Rep. John C. Otto (R-Dayton); House District 18 Otto has served in the House since 2004. He serves as the vice chairman of the House Ways and Means Committee, the tax writing committee of the House. He also serves as the chairman of the Appropriations Subcommittee on Education. Otto was recently appointed to the Legislative Budget Today’sCPA September/October 2014

Board, the group that manages the state budget between legislative sessions and assists the Appropriations Committee in developing the next biennial budget. When Otto first ran for the House, he was an individual practitioner with extensive tax experience. Because he was a hands-on tax practitioner, he is one of the most knowledgeable members on tax issues. Many other members look to Otto for advice, especially on franchise tax and property tax issues. Otto authored the bill that reformed the property appraisal process in Texas, making appraisals more consistent across the state. TSCPA has worked closely with Otto on several bills during his tenure. He is a frequent speaker at TSCPA’s grassroots seminar for legislative volunteers, held before each session. Otto has also participated in an AICPA legislative forum for CPA legislators from states around the country. He has no opponent in November.

Rep. Charles Perry (R-Lubbock); Senate District 28 Perry (not related to Gov. Rick Perry) is in his second term representing House District 83. He recently resigned his seat to run for State Senate District 28, which was vacated when Sen. Robert Duncan became the Texas Tech chancellor. The special election to fill Duncan’s unexpired term is Sept. 9, 2014. There are five candidates in the special election. If no candidate gets 50 percent of the vote, a run-off will be required at a date determined by the governor. During this past session, Perry served as vice chair of the Government Efficiency and Reform Committee and as a member of the powerful Appropriations Committee. Perry has worked with TSCPA on amending and defeating legislation that would have weakened professional standards. If Perry is elected to the Senate, he will be the only CPA senator. Perry has his own accounting practice in Lubbock. He has been endorsed by the TSCPA CPA-PAC in the upcoming special election. Phil Stephenson (R-Wharton); House District 85 Stephenson is serving his freshman term in the House. He serves on the Government Efficiency and Reform Committee and the Pensions Committee. Stephenson does have a Democratic opponent in November. During his first session, TSCPA worked closely with Stephenson on his concerns about small firm practice and found him to be easy to work with and a good listener. He has been involved in politics for some time before running for office, having served as a county chair, Republican Party of Whalton County. Stephenson has his own two-office accounting firm. n 25

TSCPA’s 2014

RISING By DeLynn Deakins | Today’s CPA Managing Editor Through the Rising Stars Program, TSCPA recognizes CPA members 40 years old and younger who have demonstrated innovative leadership qualities and active involvement in TSCPA, the accounting profession and/or their communities. After receiving over 60 nominations, a task force made up of TSCPA Executive Board members selected 20 up-and-comers for 2014. We now introduce you to the members, in alphabetical order, who are the Rising Stars honorees.

Eric D. Abati, CPA-San Antonio Partner, ATKG, LLP; San Antonio Eric Abati is a partner at ATKG, LLP in San Antonio. His knowledge, experience and personal investment in both clients and team members make him a key player in this 32-year-old, innovative, creative and fun firm. With his help, the firm has grown an average of 15 percent annually over the last three years and 16 percent since 2011. He believes that developing authentic, trusting relationships is the key to building a successful career in public accounting. He is active in the San Antonio community, serving in a leadership role with the Real Estate Council and as a founding board member, past treasurer and president of the Autism Community Network (ACN). He is a trusted advisor to his clients, a popular mentor and leader to his staff and volunteer organizations, and his colleagues believe he makes ATKG a special place.

Brandon R. Booker, CPA-Fort Worth VP Finance and Controller, United Way Tarrant County; Fort Worth Brandon Booker is the vice president of finance and controller at the United Way of Tarrant County, a $35 million nonprofit organization. He is responsible for financial statements, the annual audit and budgeting. In the three years he has worked in this position, the organization has had unqualified opinions and has tightened processes around its government grants. Through contacts at United Way Worldwide, he was selected to be part of a resource group with the Financial Accounting Standards Board (FASB). He has also been involved with several accounting sub-committees that help develop accounting guidance of United Ways throughout the United States. Booker is a mentor to local students, and as a member of TSCPA’s Fort Worth Chapter, he has led the chapter’s Relations with Educational Institutions Committee and was named Young CPA of the Year in 2013. He has excelled professionally, and seeks ways to serve his chapter and local community.

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Stephanie L. Braislin, CPA-Dallas Director of Risk Advisory Services, Whitley Penn; Dallas A successful young professional, Stephanie Braislin is the director of risk advisory services at Whitley Penn. She has worked on the creation of leadership development opportunities at her firm and throughout the community. She participated in the inaugural year of the TSCPA Dallas Chapter’s Leadership Development Academy (LDA) and the next year served on the committee that created programming for the next LDA class. From this experience, she implemented a leadership development program for the Dallas Regional Chamber Young Professionals in 2013. At her firm, she has participated in campus recruiting and served as a campus recruiting coordinator. She has also coordinated fundraising activities for the Junior League of Dallas, as well as serving as chair of the Dallas Chapter’s 2013-2014 Sponsorship Committee. Her accomplishments have exemplified her commitment to the future of the accounting profession.

Christy J. Cates, CPA-Fort Worth Partner, Whitley Penn; Fort Worth In her position at Whitley Penn in Fort Worth, Christy Cates’ duties include client service, recruiting, training and business development. She has developed strong leadership skills through creating and running a training program for the firm’s tax department, mentoring colleagues, assisting with managing recruiting efforts, and serving as supervisor for others in the department. Her volunteer commitments have included activities and financial roles with her church, the Fort Worth Chamber of Commerce, United Way, the Leukemia and Lymphoma Society, the Arts Council of Fort Worth and Tarrant County, and more. She participated in the Fort Worth Chapter’s Leadership Development Class of 2010 and Leadership Fort Worth’s Leading Edge Program in 2012. Through her work at her firm and by sharing her time and skills with groups in her community, she is recognized as a talented rising star.

Danielle Supkis Cheek, CPA-Houston President, D. Supkis Cheek, PLLC; Houston Danielle Supkis Cheek is described by others as an enthusiastic, intelligent CPA who attacks each task with confidence and competence. She began her own CPA firm in 2013, which specializes in attestation and forensics for small and medium-sized private businesses and nonprofit organizations. She has been an active member of the American Women’s Society of CPAs (AWSCPA), American Institute of CPAs (AICPA) and other professional associations. She is also active in civic and charitable endeavors, including volunteering and teaching financial literacy for the Women’s Resource Center. She lectured on financial literacy for undergraduate students at Rice University, her alma mater. She is known as a CPA who is willing to take the time to explain accounting to her colleagues, clients and referral sources, and sets high standards to accomplish her professional or personal goals.

Sheri K. DelMage, CPA-Southeast Texas Shareholder, Edgar Kiker and Cross, PC; Beaumont As a shareholder at Edgar Kiker and Cross, Sheri DelMage’s job responsibilities encompass supervising staff, reviewing tax returns and financials, managing client engagements and information systems, and overseeing staff training and disaster planning. She displays a sense of leadership in her office, the community, several nonprofit organizations, and TSCPA at both the state and chapter levels. In her chapter, she has served in various officer positions, including chapter president, and has been instrumental in involving the younger generation of CPAs, candidates and students to build a more diverse leadership base for the future. She is active in her local community as assistant secretary/treasurer for Leadership Southeast Texas and as a team captain for the local cancer society’s Relay for Life team. Her influence on the personal and professional development of others inspires them to follow her example and pursue their own leadership roles. continued on next page Today’sCPA September/October 2014

RISING STARS continued from previous page Jason B. Freeman, CPA-Dallas Attorney, Meadows Collier Reed Cousins Crouch & Ungerman; Dallas Jason B. Freeman is an attorney-CPA who represents clients in tax and white-collar disputes. He is also an adjunct law professor at SMU’s Dedman School of Law. Freeman is a dedicated volunteer member of TSCPA and the Dallas Chapter, having contributed his talents and expertise on a number of committees. He currently chairs the Dallas Chapter’s CPE Committee, and was recently recognized as the Dallas Chapter’s Committee Member of the Year. He also currently serves as a TSCPA director-atlarge. Freeman graduated from the Dallas Chapter’s Leadership Development Academy in 2011 and has been an active member of the Chapter’s LDA task force since that time. In addition to his involvement in TSCPA and the Dallas Chapter, Freeman is actively involved in a number of other professional organizations, including serving as the vice president of the North Texas Chapter of the American Association of Attorney-CPAs. As a volunteer in his local community, he has been an instructor for the YWCA and Prison Entrepreneurship Program. Freeman is an excellent example of the future of TSCPA and the Dallas Chapter.

Thania D. Gonzalez, CPA-Houston Audit Manager, Whitley Penn; Houston In her position at Whitley Penn, Thania Gonzalez plans and supervises audits of governmental entities and nonprofit organizations. She recently moved to the Houston area. She has been extremely active in TSCPA and her previous chapter, having served in a number of roles. As a member of the El Paso Chapter board and chair of the Career Awareness Coordinating Committee, she took on the challenge of growing the career awareness efforts. As chair of the committee, she organized visits to the University of Texas at El Paso, seven high schools, a middle school and an elementary school to make students aware of the opportunities available with an accounting degree. Through the visits, more than 1,300 students were reached. She has also been involved in the community through the Greater El Paso Chamber of Commerce Leadership Program, Beta Alpha Psi and Rotary International – Juarez Integra Club in Cd. Juarez, Chihuahua, Mexico. She is considered a natural leader in the accounting profession.

Rodney J. Horrell, CPA-Brazos Valley Interim Director of Accounting Services Texas A&M University; College Station At Texas A&M University, Rodney Horrell supervises and oversees the performance of financial duties, reports, metrics and other important functions. He is considered to be an outstanding representative of the profession and has worked to make TSCPA and the Brazos Valley Chapter stronger, promoting membership and its benefits to all CPAs. His work at the chapter includes service as chapter president. He began a Texas A&M outreach group to help CPAs from A&M become more involved and provide a networking opportunity for them. He also encourages and supports work/life balance and flexible work schedules for his staff. His own community outreach includes involvement at his church, the Knights of Columbus, College Station Little League, and other organizations. He is dedicated to assisting others through many roles focused on building up the profession and giving back to the community.

Gregory A. Kubes, CPA-Fort Worth Financial Advisor, Edward Jones; Fort Worth Greg Kubes is a financial advisor with a growing, successful business of his own. He is responsible for all facets of the firm, from business development to client management. He is a graduate of the Fort Worth Chapter’s leadership development program and Leadership Fort Worth, and has served on chapter committees. The number of civic and community organizations he’s been involved with is quite extensive. They include the Tarrant County Bar Association, John Peter Smith Hospital, Catholic Charities of Fort Worth, the Arts Council of Fort Worth and Tarrant County, and several other organizations. He considers his most significant community achievement to be his involvement with Junior Achievement Fort Worth. He was in Junior Achievement in high school and is now a board director, encouraging others to become financial and volunteer partners of the organization. Each day, he strives to improve and focus on doing what’s best for his clients and community.

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Adam M. Lawyer, CPA/ABV/CFF-Fort Worth Senior Manager, Dixon Hughes Goodman, LLP; Fort Worth Adam Lawyer is a dedicated senior manager and recognized expert in the business valuation arena. Over the past several years, he has led the development of a very strong valuation group at his firm, which has been recognized as one of the premier dealership valuation groups in the United States. He is also dedicated to giving back to the CPA profession and the community. He has chaired several committees and held officer positions in TSCPA’s Fort Worth Chapter. In addition, he has a deep commitment to the youth of the local community, dedicating significant efforts to the Boy Scouts of America and various religious and non-religious groups. He led a team of individuals to plan and carry out yearly retreats for 150 to 200 young men and women. Lawyer believes his career has been good to him and his family. It has given him the freedom to give back to the profession and to pursue civic interests outside of work, such as his deep commitment to bettering the youth of his community. It doesn’t get much better than that!

Joshua LeBlanc, CPA-Southeast Texas Manager, Edgar Kiker and Cross, PC; Beaumont Josh LeBlanc joined Edgar Kiker and Cross after working in a general manager position for a small company that was awarded Business of the Year during his tenure by a local chamber of commerce. His primary focus is tax, and he provides consulting, planning and preparation services. He is an active member of TSCPA’s Southeast Texas Chapter, where he has served on various committees, including as chair of the Membership Committee, and as a board member. He was one of two members on the chapter’s first scholarship fundraising raffle committee. He has been a guest speaker at Lamar University on tax-related issues. He is also a member of the Southeast Texas Young Professionals and the Southeast Texas Estate Planner’s Council, is an usher at his church, participates in many cycling charity events, and is the president/volunteer for Stable Spirit, a nonprofit organization that provides equine-assisted physical and psychotherapy. He is an intelligent young professional who believes his CPA credential will provide the opportunity to manage and run successful businesses.

Tracie L. Nobles, CPA-Austin Associate Professor, Austin Community College; Round Rock Tracie L. Nobles teaches accounting courses at Austin Community College. She is also serving on the Commission of Accounting Higher Education: Pathways to a Profession, specifically working on Recommendation #4 (Signature Pedagogy) and Recommendation #5 (Advanced Placement Accounting course). She has been recognized numerous times by her students and colleagues as an outstanding educator. She is an active member of several accounting associations. Her roles have included serving on the board of directors for the Teachers of Accounting at Two Year Colleges, chairing AICPA’s Pre-Certification Executive Education Committee, and chairing the American Accounting Association’s Teaching, Learning and Curriculum online meetings. Her work with national committees and boards gives her the opportunity to make recommendations on areas such as curriculum models and help develop strategies to attract students to accounting. She has made a meaningful impact on the CPA profession and accounting education.

Amy E. Ott, CPA-Fort Worth Attorney, The Blum Firm; Fort Worth Amy Ott is an accomplished attorney. Her job responsibilities include meeting with clients, drafting estate planning documents, preparing estate and gift tax returns, and consulting with a diverse clientele regarding their wills, structuring their business entities and other critical planning issues. She is involved with TSCPA at the state and local levels. She is a graduate of the TSCPA Fort Worth Chapter’s leadership development program, and is a leader in the chapter’s VITA and YWCA community service programs. She also works with a number of other great organizations, such as Leadership Fort Worth, CASA Tarrant County, Junior League Fort Worth and Baylor All Saints Women’s Health Foundation. Balancing her various personal and professional commitments can be challenging, but she believes it is worth it. She has excelled in her career and seeks ways to give back to her local community. continued on next page Today’sCPA September/October 2014

RISING STARS continued from previous page Angela M. Ragan, CPA-Central Texas Manager, Jaynes Reitmeier Boyd & Therell, PC; Waco Angie Ragan is a valuable member of the tax practice at her firm. Through her hard work, dedication and high aptitude for complex tax situations, she worked her way up to tax manager. She has a broad base of knowledge and experience in individual, partnership and corporate taxation. In addition to her work responsibilities, she is involved in professional and civic causes. She’s an active member of TSCPA and the Central Texas Chapter. Among several community service organizations she works with is Compassion Ministries International. She was selected to serve as president of the organization, which has the goal of reintegrating homeless individuals or those on the verge of homelessness into permanent housing and employment. She was also part of a group that served the town of West, Texas during the aftermath of the fertilizer plant explosion last year. She is described as an intelligent, talented, compassionate and joyful person who lifts up the people she encounters.

Mark K. Rich, CPA-Fort Worth Director of Investments, Kimbell Art Foundation; Fort Worth After a successful five-year career at a Big 4 accounting firm, Mark Rich became director of investments for the prestigious Kimbell Art Foundation. His responsibilities include investment analysis, portfolio management, and financial accounting and reporting. He is involved with TSCPA and the Fort Worth Chapter. He chaired the chapter’s Accounting Career Education (ACE) committee, and has worked to expand the outreach to students who may not have chosen accounting as a career. During his tenure on the ACE committee, efforts have extended to form relationships with the local community college, and the job shadow day was reinvigorated. He also recently received AICPA’s Maximo Mukelabai Award, which recognizes a young CPA who displays a commitment to the accounting profession through their successful practices and community involvement. He strives to represent the CPA profession well and inspire those who are interested in accounting work.

Brinn Serbanic, CPA-Central Texas, CFP® Tax Manager, Pattillo Brown & Hill LLP; Waco In her position at Pattillo Brown & Hill, Brinn Serbanic provides financial planning and tax consulting services to individuals, partnerships, corporations, estates and trusts. She strives to use her professional knowledge to explain technical accounting topics in a way that guides her clients in making the best decisions for themselves and their businesses. She is a valuable, proficient and highly respected member of TSCPA’s Editorial Board for Today’s CPA magazine. As a skilled evaluator, she provides content oversight by reviewing and fact-checking submitted articles, and has authored several articles for the magazine. She also writes articles for her firm’s newsletters and publications. In addition, she serves as treasurer of the Heart of Texas Estate Planning Council and is on the Board of Directors for Fuzzy Friends Rescue. She is a bright, enthusiastic young professional who enjoys learning and educating the public about accounting and taxation.

Jennifer G. Sicking, CPA-Dallas, PFS Vice President, KHA Accountants and Advisors PC; Flower Mound and Denton As a partner at KHA Accountants and Advisors, Jennifer Sicking is responsible for maintaining and growing relationships with existing clients, helping to grow the firm with new clients, federal and state income tax planning, and business consulting. Her area of expertise is health care. She created and leads the health-care specialization at the firm, and continues to build a strong base of health-care clients. She believes that a focus on continual personal improvement and a desire to treat people the way she expects to be treated has been some of the biggest contributing factors to her success. In the community, she has been involved with the sports activities of her children and the finance council at her church. She is described by her colleagues as an innovative and motivated individual who provides excellent advice and assistance to others.

Today’sCPA

John M. Wauson, CPA-Dallas Senior Manager, Advisory Services Weaver; Dallas John Wauson is a leader in the Risk Advisory practice at Weaver. His duties include supervising and executing risk assessments, internal audits, business process consulting services, and SOX compliance engagements for multiple public and private companies, and for local and state governments. Since joining TSCPA, he has been a cornerstone of the Dallas Chapter’s youth-oriented activities. He was a member of the inaugural class of the Leadership Development Academy in 2009, and went on to assist in establishing the Dallas Chapter’s Young Professionals group, serving as the first chair. He is a frequent participant on charity projects for the chapter and is a dedicated volunteer whenever his support is requested. He is the current chair for TSCPA’s Young CPAs and Emerging Professionals Committee and is an active, faithful member of the Prestonwood Baptist Church in Plano. He is an exceptional manager, committed staff mentor and an asset to his firm, profession and community.

Justin D. Watson, CPA-Dallas, PFS, CFP® Partner, Beaird Harris & Co, PC; Dallas Justin Watson joined Beaird Harris & Co. in 2006 and became a partner in January 2014. His focus at the firm is on offering tax consulting and compliance services for closely held businesses, and high-net worth and high-earning individuals. He is responsible for business development, maintaining and improving client relationships, mentoring and leading staff, and ensuring the firm is delivering high-quality services. As an active member of TSCPA’s Dallas Chapter, he was part of the founding class of their Leadership Development Academy in 2009, and helped establish the Dallas Chapter’s Young Professionals Group that evolved from it. In 2012, he was awarded the Outstanding Committee Chairman Award by TSCPA’s Dallas Chapter. He’s now a member of TSCPA’s Young CPAs and Emerging Professionals Committee and has a goal of recruiting youth into the organization. He also serves on the Undergraduate Advisory Council at the University of Texas at Dallas’s Jindal School of Management. He is considered a diligent CPA and a strong, up-and-coming leader. n

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4/1/13 2:09 PM

FEATURE

Closing the Generation Gap: Tips for Interviewing Millennials

By Charles E. Davis and Anthony Herrera

illennials. Gen Y. The Net Generation. The Peter Pan Generation. The Boomerang Generation. Whatever you call them, the generation that is quickly replacing retiring baby boomers in the workforce is a unique group of individuals. While millennials currently comprise about 25 percent of the U.S. population, they account for only 10 percent of today’s workforce. However, it is predicted that with baby boomers retiring at increasing rates, millennials will comprise 36 percent of the U.S. workforce in 2014, 46 percent of the U.S. workforce in 2020, and as much as 75 percent of the U.S. workforce in 2025. This means that if organizations are going to be successful in recruiting these individuals into the organization, interviewers need to know how they think and what they value.

Millennial Demographics and Characteristics Just as there is not 100 percent agreement on what to call this generation, there is not complete agreement on exactly who is a member of it. William Straus and Neil Howe, authors of Millennials Rising: The Next Great Generation, define the millennial generation as those born between 1982 and 2002, although other researchers extend the birth years as early as 1977 and as late as 2003. Millennials have lived and learned in a world that is vastly different from that experienced by baby boomers and generation Xers. Consider the Benoit College Mindset List for the Class of 2015, which captured the worldview of college freshman who will graduate in May 2015 (see www.beloit.edu/mindset for more information about this annual list). Millennials have always had access to the Internet, have never seen a Sears catalog, have never used a dial to change channels on a television, and have often broken up with a significant other via texting

or Facebook. They might assume that LBJ is LeBron James, and Ferris Bueller could be their father. Howe and Strauss identify seven distinguishing traits for the millennial generation (see Table 1), and various studies have identified other descriptive characteristics. As a group, they are very savvy with technology; after all, they have grown up with the Internet. They text and tweet rather than making a personal visit, calling on the telephone or sending an email.

What Millennials Expect from Their Employer In their May 2010 Harvard Business Review article “Mentoring Millennials,” Jeanne Meister and Karie Willyerd identify the top five characteristics the millennials seek in an employer. Included on the list are skill development opportunities, strong values, customizable benefits

Table 1: Seven Distinguishing Traits of the Millennial Generation Special

Millennials sense that they are, collectively, vital to the nation and to their parents’ sense of purpose.

Sheltered

They are the focus of the most sweeping youth safety movement in American history.

Confident

With high levels of trust and optimism, millennials are beginning to equate good news for themselves with good news for their country. They often boast about their generation’s power and potential.

Team-Oriented They are developing strong team instincts and tight peer bonds. Achieving

This generation is on track to become the best-educated and best-behaved adults in the nation’s history.

Pressured

Millennials feel a “trophy kid” pressure to excel.

Conventional

Taking pride in their improving behavior, they support convention – the idea that social rules can help.

Source: Neil Howe and William Strauss. (2000). Millennials Rising: The Next Great Generation, New York: Vintage Books, pp. 43-44. 32

Today’sCPA

and rewards, work/life blend, and a clear career path. The Deloitte Millennial Survey: 2014 reports that more than 75 percent of millennials give significant weight to an organization’s degree of innovative thinking when selecting an employer, and they desire an employer that will develop their leadership skills. Diane Speigel, CEO of the leadership training firm The End Result, summarizes their expectations of employers as: coaching (frequent coaching and feedback), collaboration, measures (metrics-based performance assessment), and motivation (comfortable environment that encourages contributions without fear of criticism). Millennials are loyal to friends and family, but not necessarily loyal to their employer. In fact, they may appear to be job hoppers, with an average of only two years at their first job and an average of nine jobs in the first 15 years of their career. PricewaterhouseCoopers reports in its 2011 “Millennials at Work: Reshaping the Workplace” study that more than 25 percent expect to have six or more employers during their career. And not only do they change jobs, they also change careers. Meister and Willyerd also report the top five characteristics millennials desire in a boss. These employees want someone who will help them navigate their career path, give straight feedback, be a mentor and coach, sponsor them for formal development programs, and is comfortable with flexible work schedules. Given the high value placed on lifestyle and flexible work arrangements, millennials are often willing to sacrifice upward professional mobility and financial rewards to achieve the desired flexibility. Millennials are entrepreneurial, which is reflected in a recent study of Facebook profiles by Millennial Branding that found that only 7 percent of millennials work for Fortune 500 companies and “owner” is the fifth most popular job title listed on their profiles. A recent survey conducted by the University of North Carolina’s (UNC) Kenan-Flagler Business School and the Young Entrepreneurs Council (YEC) further supports this trait, as 30 percent of the respondents had started a business in college and 35 percent had started a side business at some point in their lives. In the workplace, this entrepreneurial spirit is borne out by their

willingness to take risks and learn from their mistakes. To learn more about the survey results, see onlinemba.unc.edu/mba-at-unc-blog/genyin-the-workplace. Deloitte’s The Millennial Survey – 2011 found that this generation has a different view of the purpose of a business. Over 50 percent of the millennials surveyed believed that businesses exist primarily for innovation and the development of the greater society. In fact, 52 percent of the those in the study (compared to 35 percent of current business leaders) believe that business will have the greatest impact in solving the future challenges facing society. And when asked how to measure a business’s success, 92 percent said that success was more than just economic profit, much greater than the 71 percent of current business leaders who believed this was true. What does all this mean for the organization seeking to hire these candidates? Sure it means that interviewers will need to carefully assess a candidate’s cultural fit. But given the numbers of millennials who will likely be joining the organization, it may signal the need to begin changing the corporate culture now to attract and accommodate these employees. For example, organizations must consider issues such as the flexibility of the firm’s work hours. Are employees expected to be at their desks from 8 a.m. to 5 p.m. (or longer), or is the company/firm more concerned with getting the job done on time, even if the employee can do it by working from 10 a.m. to 4 p.m. and telecommuting a couple of days each week? In light of the UNC/YEC survey’s findings that 80 percent of the respondents prefer real-time performance feedback over more traditional periodic performance reviews, are managers ready to provide supervision and feedback on a more frequent basis? Are managers ready to take on a more demanding mentoring role to meet millennials’ desire for active mentoring and coaching? If not, it will probably be hard to attract them to accept positions with the organization. And if they do accept a position, it will be difficult to retain them. continued on next page

Table 2: Rephrasing Interview Questions “Old” Question

“New” Question

Where do you see yourself in five years?

What do you believe you will have to do to advance to your next position with the company?

What are your long-range goals?

What are you expecting to get out of this job?

Tell me about yourself.

When you have information to share with your friends, how do you communicate? Think about a recent time when you faced a dilemma. How did you approach the dilemma to reach a solution?

Why should we hire you for this position?

What do you see in this job that will keep you interested and motivated to perform your best?

What are your strengths?

What would friends say is your greatest strength?

What is your biggest weakness?

Think about a time when you were not able to complete a task as well as you had hoped. What got in your way?

What do you look for in a job?

When you do an outstanding job, how do you want to be rewarded? What type of performance feedback do you prefer? How often? From whom?

Adapted from Bill Pisano, Interviewing Millennials, www.buildaninterview.com/interviewing_millennials.asp Today’sCPA September/October 2014

FEATURE continued from previous page It’s Time to Rethink Your Interview Questions Armed with a better understanding of millennials, interviewers should recognize the need to rethink and revise their approach to the standard job interview. In a recent Forbes.com blog post, Denise Restauri challenges interviewers to do just that after learning that the top three most difficult questions asked in job interviews in 1983 were still among the most frequently asked interview questions in 2012: 1) Tell me about yourself; 2) What do you know about our organization; and 3) Why do you want to work for us. Given the differences in the attitudes and expectations of millennials, these questions may not be the best ones to be asking in 2014. Buildaninterview.com offers some suggestions on how to rephrase “old” questions to increase the quality of information gathered in a job interview. Surface-level questions need to be rephrased to prompt candidates to reveal their perceptions. Millennials are less likely than previous generations to have a clear vision of a five- to 10-year career path. Remember, these candidates will change jobs on average every two years, so interviewers will need to probe deeper to understand their career perceptions and may need to focus on a much shorter time horizon. To uncover a candidate’s personality, work ethic and motivation, use personal questions that place the candidate in a situation or task that he/she has actually experienced. Remember, these individuals like structure and guidance, so avoid extremely open-ended questions such as “tell me about yourself.” A question like this may be difficult for the

candidate to answer because they are not sure how much an interviewer wants to know about them, and in the end they will likely not provide adequate information on which to base a hiring decision. This generation is used to giving and receiving feedback frequently. After all, they live in a world filled with Facebook, Twitter, blogs, message boards and texting where comments and feedback are made in real time. They will not be shy about telling you what they think about a topic or an event, so ask them directly about their strengths and weaknesses. As interviewers rethink their standard interview questions, they must remember that they need to develop questions that will help predict the candidate’s work style. Avoid off-the wall questions, such as “If you were a fruit, what kind of fruit would you be?” and excessively general questions, such as “Tell me about yourself.” The answers to these questions will provide very little insight into the candidate’s skill set and work ethic. Instead, place the candidate in a familiar context before asking him/her to describe a characteristic. Table 2 provides some examples of how to rephrase standard interview questions for today’s millennial candidates. Restauri also offers some new questions tailored to millennials. For example, an interviewer might ask the following: “It’s 8 a.m. You just arrived at work and the whole computer system collapsed. You have no technology available. What do you do and how do you get on with your day?” For individuals who live and breathe technology, this situation would be a challenge. But in asking this question, an interviewer will

Table 3: Favorite Interview Questions What is your favorite question to ask a job candidate in an interview?

What insight do you hope to gain from the job candidate’s answer to this question?

What was your first job or first thing you did to earn money? How old were you?

Work ethic; prior experience not on resume; insights about how the candidate views earning money

What do you want to achieve professionally over the next three to five years and what have you done to prepare for it?

Can the candidate think a level or two above immediate requirements; sense of long-term value

In your prior work experience, what was (1) your favorite project that you worked on, and (2) your least favorite project that you worked on. Why?

Candidate preferences for a team environment or a solo project; teachability and responsiveness to criticism/praise; preferences in job function and task

Please explain to me a time in which you were able to successfully sell a product, a service or yourself to a qualified prospect. Why do you believe they chose you?

Four different responses to "why" that individual chose/bought from them: trustworthiness; likability; ability to tell a story (make it real); ability to create value for customers

What are your interests and ambitions outside of work?

Presence of goals/hobbies/interests outside of work provides evidence of a well-rounded person

If you were to be alone on an island, away from civilization, what would you pack?

Ability and preference to work alone or in teams

Why are you interested in THIS job?

Perception of how this job fits into a longer career plan

You are hosting an intimate dinner party and invite five guests (living or dead). Who do you invite and why?

Ability to think on one’s feet

According to your Facebook posts, you spend a significant amount of time [insert two activities here]. How has the time spent on those activities prepared you to be a [insert job title] for us?

Recognition of the importance of social media in developing a personal brand, and how that brand affects perceptions of both a personal and professional nature

Today’sCPA

While millennials do present some challenges to the current way of operating, the reality is that if an organization is going to be successful in attracting and retaining these workers, change will be necessary.” learn about the candidate’s information gathering and problemsolving ability, initiative and ability to think and act without the help of technology. To see other questions she proposes for today’s job candidates, see her blog entry at www.forbes.com/sites/deniserestauri. To learn more about how interviewers were adapting interview questions, we posted a survey link to some LinkedIn groups and asked group members to provide their three favorite interview questions. Table 3 provides several of the questions we received. Notice that not all of the questions conform to our rephrasing suggestions, so there is still some work that interviewers need to do in planning interviews.

It’s Time to Rethink Your Interview Answers While one goal of the interview process is to assess a candidate’s skill level and cultural fit with the organization, the interviewer must also sell the organization and the position to the candidate by providing answers to candidates’ questions about the organization and position. This means that the interviewer must understand what the candidate desires in a career and from an employer so they can provide relevant information to assist the candidate in his/her decision. Millennials typically want to make a difference in the organization and want to add value beginning on day one of the job. They also desire an organization that invests in their career development, as evidenced by the UNC/YEC survey findings that 65 percent of the respondents believe that the opportunity for personal development is the most influential factor in their current position. Given this level of importance, you will need to openly discuss growth opportunities within the organization and illustrate a typical advancement path. Highlight career and personal development opportunities and resources, such as formal mentoring programs and rotational assignments that are available to employees. In this way, the candidates will see how the position is a positive opportunity for their career development and how they will be an integral part of a dynamic team. Interviewers also need to prepare for a new set of questions from the job candidates. For instance, they may find themselves having to describe how the company provides “fun” activities to encourage team building when a candidate asks if the office has a softball team and if the employees see each other socially. Such a question should not be interpreted as an indication that the candidate is more focused on “fun” rather than work or as a red flag for not hiring the individual. The candidate is merely reflecting his/her millennial nature.

One area of potential surprise is questions about the organization’s social media policy; 64 percent of the respondents in the UNC/YEC survey had asked a potential employer about its social media policy. And one-third of these respondents view social media freedom as more important than salary when evaluating a potential job. Remember, they have grown up with Facebook, Twitter, FourSquare and other social media tools, so be ready to explain the organization’s policy. If the organization does not have a policy, it is probably time to develop one. Millennial candidates also may ask about the company’s procedure for appealing a performance evaluation or an explanation of how the company implements flexible work hours. If interviewers start getting questions such as these, they should not take it as a sign of an aversion to hard work. Rather, they should see it as a reflection of the traits that are here to stay, and search for ways that the organization can embrace these new hiring realities and maximize their employees’ productivity.

Adapting to the New Reality Hopefully at this point, interviewers haven’t thrown their hands up in defeat. While millennials do present some challenges to the current way of operating, the reality is that if an organization is going to be successful in attracting and retaining these workers, change will be necessary. Continuing to do things the way they have always been done will not be an acceptable response if the organization wants to identify and hire the best candidate. As organizations rethink their interview questions and reconsider answers they might receive, they must also develop a clear picture of the ideal candidate. However, organizations should not just make a carbon copy of the ideal candidate they have always sought. Rather, they must look for any artificial constraints that have been placed on the ideal candidate. For instance, the organization still wants to identify a hard worker, but they must recognize that a millennial will want to work hard on their own schedule, which may not be during the current constraints of the traditional 8 a.m. to 5 p.m. workday. Highly educated team players who believe they can accomplish anything they set their minds to, these employees have a lot to offer their employer. As the talent pool continues to evolve into a millennial generation majority, failure to adapt your interviewing approach as described above will result not only in unfilled positions, but also lost opportunities to secure the first-class talent required for the organization to be competitive in today’s economy. n

Charles Davis

is Walter Plumhoff Professor of Accounting and holder of the Emerson O. Henke Chair of Accountancy at Baylor University’s Hankamer School of Business, where he teaches managerial accounting and accounting research and communication. He can be reached at Charles_Davis@baylor.edu.

Anthony Herrera

currently serves as executive director of SMU Cox Latino Leadership Initiative. The initiative’s mission is to discover, develop and encourage high-performance Latino executives who will drive business growth and create a sustainable competitive advantage for their companies worldwide. Prior to joining SMU Cox, he held faculty and career development positions at Baylor University, talent acquisition positions at KPMG, Robert Half, Inc., his own firm, and CB Richard Ellis. He can be reached at anthony@smu.edu.

Today’sCPA September/October 2014

FEATURE

Social Networking: Legal Issues and Implications for Employer Policies

By Clifford M. Koen, Jr., Ph.D., Amy Menerick and Paul E. Bayes, Ph.D.

ocial networking and media sites can provide efficient means for CPAs to achieve an organizationâ&#x20AC;&#x2122;s strategy to market services to a vast client base. Used for marketing and customer services, networking sites and blogs allow the employer and employees to quickly communicate and share information within the organization and with consumers and clients. Despite the advantages of using social networking sites, however, employers must establish policies that promote professional communication, uphold the organizationâ&#x20AC;&#x2122;s reputation and maintain trust with consumers and clients while protecting the organization. For CPAs, establishing effective social networks and incorporating social media can present internal control issues. Employers must establish or modify existing company policies to address these emerging technologies. This article provides a summary of applicable legal issues to social networking sites, the trade-offs between interests, and recommendations for amending current workplace policies. As this article suggests, there are challenges associated with public information, free speech and privacy that employers must consider when establishing effective social media policies.

Legal Issues In the age of the information highway, social networking and media sites have grown exponentially. This is evident from the growth of such websites as Facebook, LinkedIn, Twitter and YouTube. Blogs and other forms of social networking are an effective way to share information and receive feedback from different constituencies. Although the distinctions 36

are often blurred, a social networking site consists of communities, while media simply provides broadcasting opportunities for feedback or blogging. These sites are well suited for intranets whereby vital information can be shared within a company, as well as extranets where company information is shared with current and potential customers. Blogs and other sites are being used as company marketing and recruiting communication tools. Employers such as Southwest Airlines, IBM, Disney and Siemens have embraced employee blogging, minimizing concerns of negative consequences. Creating opportunities for branding, these sites also allow employers and employees to develop reputations and build trust both within and outside the organization. One common attribute of blogs and networking sites is that they encourage the free exchange of candid ideas and opinions. This, coupled with an extremely large audience, creates an environment where both the employer and employee face an abundance of potential legal liability. A partial list of legal issues that may arise from activities associated with employee blogging and social networking includes: defamation, invasion of privacy, free speech, employment at will, wrongful discharge, interference with business relationships, disclosure of trade secrets or other confidential information, whistle-blowing statutes, anti-discrimination laws, labor laws, disciplinary issues and securities law violations. The potential liability associated with defamation and invasion of privacy are among the primary concerns facing both employers and employees. A detailed review of the law related to defamation and invasion of privacy is outside the scope of this article. However, an overview of some Todayâ&#x20AC;&#x2122;sCPA

general principles is helpful to better understand the potential liability associated with employee blogging and other forms of social networking. Liability for defamation is a growing threat to employers as a result of the increased popularity of employee-maintained blogs and networking sites. Just as employers may be held liable for defamatory statements published by their employees, they may also be liable for an employee’s statements made on private blogs regarding topics that fall within the scope of the employer’s actual or apparent authority. An employer may also be held liable where the blogging employee is a supervisor, even if the statements are made outside the scope of employment. For example, Cisco Systems, Inc. and one of its lawyers, Richard Frenkel, were sued for defamation over an anonymous blog in which Frenkel allegedly accused two Texas attorneys of engaging in criminal conduct in a case against Cisco. Ward v. Cisco, No. 2007-2502 (Gregg Co., Texas, Dist. Ct.); Aibritton v. Cisco, No. 2008-481-CCL2 (E.D. Texas). The second wrong, publication of private facts, occurs when there is an intentional or negligent public disclosure of private facts and such disclosure would be highly offensive to a reasonable person. One of the primary issues in a suit of this type is whether the matter being publicized is public or private. A statement on a blog that “Mr. X was convicted of possession of illegal drugs when he worked for Y” is not by itself actionable if Mr. X was actually convicted of the offense where these facts were readily attainable by public records. If the matter is one of public concern, there may also be no invasion of privacy. The third wrong, publicly placing a person in a false light, occurs when information is published about a person that is false or places the person in a false light, is highly offensive to a reasonable person, and is published with knowledge or in reckless disregard of whether the information was false or would place the person in a false light. Note that any of these three wrongs may be waived by the plaintiff if the plaintiff publishes the information or if he/she willingly or knowingly permits it to be published. The fourth basis for a claim of invasion of privacy, appropriation of name or likeness, occurs when someone uses the name or likeness of another to attain some benefit. This issue could arise, for example, when a blogger uses a picture of someone or the organization to promote a product or cause without permission. Employers should always keep in mind that under the laws of most states, an employee who is not protected by a contract may be terminated for any reason (not illegal reasons) at any time. Posting anti-employer comments on a blog would, in the vast majority of cases, be an offense that would justify termination. A number of lawsuits involving termination and discrimination claims have been filed against employers based on comments posted on blogs and networking. For example: • In Georgia, a former Delta Air Lines Inc. flight attendant who claimed she was fired after she posted photos of herself in uniform on her Internet blog sued the airline for sexual discrimination. Simonetti V. Delta Airlines Inc., No. 5-cv-2321 (N.D. Ga. 2005). • In Colorado, a group of Quiznos Master LLC franchisees sued the company for wrongful termination, claiming they were retaliated against for posting on their blog the suicide letter of a former franchisee, who attributed his suicide to troubles at work. Bray v. QFA Royalties, No. O6cvO2528-JLKCBS (D. Del.). Employees who want to maintain a blog or website should never post any comments they would not be willing to publish in the company newsletter. If a web diary is kept, don’t publish it for everybody to see. It would be wise to maintain anonymity by not using names or mentioning specifics. Avoid posting pictures of coworkers, clients and customers who Today’sCPA September/October 2014

may be easily identified. Employees should also avoid directly stating the organization’s name or using the likeness of the organization on these websites containing personal opinions or communications.

Balancing Interests The aggressive use of social media by employers requires that companies have policies in place for employees serving business interests without being overbearing or too restrictive. The key to accomplishing this is to align policies with the company’s overall Internet presence while setting forth the prohibitions in the context of protecting the company against more than simple negative publicity. The popularity of sites such as Facebook is a symptom of a larger growth of net-based activity by both employers and employees. Many companies have embraced the growth of net-based activity and the popularity of social networking sites to develop a corporate presence in cyberspace. Social networking sites offer an opportunity to improve the firm’s community presence, launch new marketing campaigns and improve client access to information. These sites offer employees opportunities to interact with others in the same field, to exchange ideas and knowledge and to network. Organizations can communicate with current or perspective customers, as well as recruit new employees through social media, building trust by developing relationships online. Social media can be a positive and effective form of communication for both employers and employees. To completely ban or significantly limit employee use of social networking sites outside of work could have a negative impact on employee morale and hurt business. When adopting any policy or procedure to monitor harmful online activity, employers should weigh the risks of inappropriate online activity against the potential harm to employee relations if the company’s efforts go too far and are perceived as excessively intruding into employees’ private lives outside of work. Amending Existing Workplace Policies Despite the advantages of incorporating social media and networking sites into a business’s strategy, social networking in the workplace has also become a significant drain on productivity for all types of business. In some work settings where employees may not have ready access to employer-provided Internet access, social networking activity may often be conducted over smart phones and can easily violate general conduct rules that already exist. Regardless of whether employees are writing on a blog, texting friends or uploading pictures, they are not doing the jobs they were hired to do. Where employees have employer-provided Internet access, use of those resources for social networking will often fall outside the employer’s current policies concerning acceptable use of technology, because the use is not business-related. Some conduct may also violate employer policies concerning harassment, confidentiality or security. If an employee uses the network to reveal personal client information, confidentiality or security may be breached. In general, current policies will already regulate much of what is considered undesirable conduct in the workplace. These policies can easily be updated to include social networking as an example of employee conduct that crosses the line. For example, a policy that prohibits employees from discussing information about clients could be updated to prohibit “posting information about clients online.” The key is to examine the policies already in place and amend those policies to make sure they reference new media where appropriate. continued on next page 37

FEATURE continued from previous page National Labor Relations Board Complaint The National Labor Relations Board’s (NLRB’s) General Counsel issued a complaint against a Connecticut ambulance service in 2010 alleging that one of its union-represented emergency medical technicians was unlawfully terminated after criticizing her supervisors on Facebook. The complaint also alleged, among other things, that the company’s blogging and Internet policy “interferes with, restrains and coerces” employees in the exercise of their rights under the National Labor Relations Act (NLRA). In the board’s press release, it stated that the employee posted harsh and negative comments about her supervisor on the employee’s personal Facebook page from her home computer after her supervisor addressed a customer complaint with her. This posting drew supportive responses from her coworkers, which led to more negative comments about the supervisor from the employee. Once the postings got back to the company, the employee was fired after a thorough investigation into the Facebook postings. This was not the board’s first attempt to protect employee speech through electronic media. In previous decisions, the board has held that employees have the right under the NLRA to engage in free speech as a form of “concerted activity” for their “mutual aid or benefit” through website postings and emails. However, employees are generally not protected when their speech is personal in nature and is malicious, disloyal or reckless. It should be noted that both unionized and nonunionized employees have these protected rights under the NLRA.

Effective Social Networking Policy Directly regulating an employee’s off-duty social networking conduct presents the employer with a much more complex proposition. The company should first examine how the company’s employees social networking activities might enhance or detract from the company’s image. Where the company sees opportunities for employees to support and improve the company’s image, social networking policies will generally be less restrictive. Where a company is highly sensitive to negative attention or concerned about liability under the law, these policies will have to be more restrictive. A well-crafted blogging and social networking policy should: • Require that all information posted or published by an employee comply with the firm’s existing policies and procedures, including, for example, the firm’s policies in 1) protecting confidential and proprietary information, 2) safeguarding company property, 3) prohibiting any type of employment discrimination or harassment, and 4) governing the use of the firm’s communication and computer systems; • Prohibit reference to any of the firm’s clients either directly or indirectly; • Ban use of the firm’s name, logos, trademarks or other identifying marks or copyrighted material;

• Ensure that employees do not include their company email address in their personal profiles on social networking sites; • Require employees to use disclaimers in any online or social networking activities that clearly state that views and opinions expressed belong to the author and do not represent the firm; • Remind employees that their activities online reflect the firm and its commitment to its clients and the greater community; • Remind employees that material should not be posted that is obscene, vulgar, defamatory, threatening, discriminatory, harassing, abusive, hateful or embarrassing to another person or entity; and • Remind employees to be respectful of clients, customers, vendors, competitors, co-workers and the company’s reputation at all times. In addition to adopting a policy specifically governing social networking, employers should educate employees on the organization’s expectations regarding use of Internet-based social media and educate them on appropriate versus inappropriate use of social networking sites. Employees who understand the personal and professional risks of inappropriate activity will be more likely to self-regulate their online behavior. Also, the employee can use social media as a method for enhancing the organization’s presence online, building the company’s reputation while attracting new customers.

Final Words of Advice for Employers As with all policies, the limits placed on employees should be clearly stated to ensure employees are fully aware of what is not permitted. All provisions of policies should be consistently implemented, and violators should be disciplined in a consistent manner. The employer should state that a violation of the policy may subject the employee to disciplinary action, including termination. The employer should ensure the policy is distributed to all employees with receipt acknowledged in writing. By implementing these provisions, employers may substantially reduce the potential legal liability associated with employee blogging and other forms of social networking. While social networks are expanding rapidly and provide additional strategic firm or company presence, strong internal controls need to be established. The free exchange of ideas via the Internet and intranet can improve knowledge sharing and allow a greater market presence. However, employers and employees have to be aware of the potential legal problems. This article does not provide a comprehensive example of legal issues, but provides a good basis for issues to consider before opening social networks for all employees to use. n Reference List Bray v. QFA Royalties, No. O6cvO2528-JLKCBS (D. Del.). Ward v. Cisco, No. 2007-2502 (Gregg Co., Texas, Dist. Ct.); Aibritton v. Cisco, No. 2008481-CCL2 (E.D. Texas). National Relations Labor Board. (Nov. 2, 2010). “Complaint alleges Connecticut company illegally fired employee over Facebook comments: Employee posted remarks about supervisor following work-related incident.” New Release. Retrieved from www.nlrb.gov. Simonetti V. Delta Airlines Inc., No. 5-cv-2321 (N.D. Ga. 2005).

Clifford M. Koen Jr., J.D.

is a professor of Business Law at East Tennessee State University.

Paul E. Bayes, Ph.D.

is a professor of Accountancy at East Tennessee State University (Retired).

Amy Menerick, MACC

at East Tennessee State University.

Today’sCPA

CPE ARTICLE

Curriculum: Accounting and Auditing Level: Basic Designed For: Public Practice, Business and Industry Objectives: Although FASB issued SFAS 157, Fair Value Measurement (ASC 820, Fair Value Measurement) and SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (ASC 825, Financial Instruments) on the important issue of fair value accounting in 2006/2007, the purpose of this article is to help fine-tune your skills in accounting and auditing in this area. It will briefly summarize Statements 157 and 159, provide examples to clarify difficult points and discuss the strengths and weaknesses of implementing these statements. In addition, because of today’s focus on international standards, it will discuss IASB’s position on fair value accounting and the accounting/auditing concerns in using fair value accounting. Key Topics: Fair value, Level 1 input, Level 2 input, Level 3 input, financial instruments, quoted market Prerequisites: None Advanced Preparation: None Today’sCPA September/October 2014

Fair Value Accounting: An Overview

By Patricia Z. Galletta, MBA, CPA, and Baruch Englard, MS, MBA, CPA

o modify a quote by television journalist Brit Hume: “Fair value is not an attitude. It’s a professional skill that must be developed and exercised.” Although the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurement (Accounting Standards Codification ((ASC)) 820, Fair Value Measurement, FASB.org) and SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities (ASC 825, Financial Instruments, FASB.org) on the important issue of fair value accounting in 2006/2007, the purpose of this article is to help fine-tune your skills in accounting and auditing in this area. We will briefly summarize Statements 157 and 159, provide examples to clarify difficult points, and discuss the strengths and weaknesses of implementing these statements. In addition, because of today’s focus on international standards, we will discuss the International Accounting Standards Board (IASB) position on fair value accounting and the accounting/auditing concerns in using fair value accounting.

SFAS 157 (ASC 820, Fair Value Measurement) This statement defines fair value, establishes a system for measuring the fair value of financial assets and liabilities, and expands disclosure requirements. However, it does not require or permit the use of fair value over and above what was required or permitted before this statement was issued. What exactly are financial assets and liabilities? These are assets and liabilities that convert directly into known amounts of cash, such as investments in stocks and bonds, notes receivable and notes payable, bonds payable and derivative securities. Prior to this statement, there were different definitions of fair value and limited guidance for applying these definitions. Furthermore, that guidance was dispersed among the many accounting pronouncements requiring the use of fair value. These factors created inconsistencies that added to the complexity of Generally Accepted Accounting Principles (GAAP). The purpose of this statement was to create a uniform definition of fair value for all situations. The original statement’s definition retains the old exchange – price notion of earlier definitions with a clarification. It states that the exchange price is “the price in an orderly transaction between market continued on next page 39

CPE ARTICLE continued from previous page participants to sell the asset or transfer the liability in the entity’s principal or most advantageous market.” An “orderly transaction” is one that involves market participants willing to transact and that allows for adequate exposure to the market before the transaction date. In contrast, a liquidation transaction (fire or distress sale) that does not meet these criteria would not be considered an orderly transaction. Fair value is a market-based measurement, not an entityspecific measurement. The definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), rather than on the price paid to acquire the asset or received to assume the liability (an entry price). Although exit price and entry price appear to be the same – after all, the price the seller receives is the same as the price the buyer pays – they will often be different. This will occur if the entity sells the item in one market, but buys it in a different market. The statement presents three types of valuation approaches for measuring fair value: market, income and cost. Under the market approach, valuation is based on market transactions for identical assets or liabilities. If these are unavailable, the entity may use matrix pricing for debt securities or price-earnings ratios for equity securities. The income approach, on the other hand, estimates future cash flows and converts these to a single amount using present value computations. The cost approach calculates an asset’s replacement cost taking into account obsolescence and depreciation. Companies may use one or more of these approaches depending upon the circumstances. The statement also provides a hierarchy of ratings to evaluate the quality of the inputs used in arriving at fair value: Level 1, Level 2 and Level 3. Level 1 is the most preferred level since it uses quoted market prices in active markets for identical assets and liabilities. Level 2 uses inputs (other than quoted prices included within Level 1) that are observable for the asset or liability either directly or indirectly, while Level 3 uses unobservable inputs. Exhibit I presents these levels with examples. The statement and subsequent updates also require additional disclosures in annual and interim statements for each major category of assets and liabilities. These include: a. For recurring and nonrecurring fair value measurements, the fair value measurements at the reporting date, and for nonrecurring fair value measurements, the reasons for the measurements must also be disclosed. b. The level of quality (Level 1, 2 or 3). c. For Level 3 inputs, a reconciliation of the beginning and ending balances including … i. Total realized and unrealized gains and losses for the period (including a description of where unrealized gains/losses are reported in the financial statements). ii. Purchases, sales, issuances and settlements (each type disclosed separately). iii. Transfers in and out of Level 3, the reasons for the transfers and the transfer policy. d. For recurring and nonrecurring fair value measurements within Level 2 and Level 3, the valuation technique (market, cost or income) used to determine fair value, explanation of the inputs used and a description of any changes in the valuation technique. e. For fair value measurements within Level 3, quantitative information about the significant unobservable inputs used in 40

the fair value measurement valuation. For assets and liabilities measured at fair value on a recurring basis, the amount and reasons for any transfers between Level 1 and Level 2, and a description of the transfer policy. Transfers into each level must be disclosed and discussed separately from transfers out of each level. g. For recurring and nonrecurring fair value measurements, if/why the highest and best use of a nonfinancial asset differs from its current usage. h. For recurring and nonrecurring fair value measurements within Level 3, a description of the valuation processes used. i. For recurring fair value measurements within Level 3, a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs if those input changes could cause a significant change in the fair value measurement. f.

ASC 820 affects: • SFAS 140/ASC 860, Transfers and Servicing – transferred assets are measured initially at fair value. • SFAS Statements No. 115/ASC 320, Investments-Debt and Equity – restricted stock both initially and subsequently are measured at fair value. • SFAS Statement No. 133 & 155/ASC 815, Derivatives and Hedging – derivative instruments are measured initially and subsequently at fair value. • FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements – is clarified by ASC 820. The following topics refer to fair value, but do not need to adhere to the ASC 820 methods of calculating fair value: • ASC 718, Compensation-Stock Compensation (except 718-40, which would follow ASC 820). • ASC 505-50, Equity Based Payments to Non-Employees. • ASC 330, Inventory. • ASC 840, Leases.

SFAS 159 (ASC 825, Financial Instruments) This statement, unlike SFAS 157, expands the use of fair value to all financial assets and liabilities except for the following: a. An investment in a subsidiary or VIE requiring consolidation. b. Assets and liabilities related to pension and postretirement benefits. c. Assets and liabilities recognized under lease agreements. d. Deposit liabilities of banks and similar depository institutions. e. Financial instruments that are, in whole or in part, classified by the issuer as a component of shareholder’s equity. Under the provisions of this statement, companies are not required, but have the option to report their financial assets and liabilities at fair value (as defined in SFAS 157). If they choose to do so, then all unrealized holding gains and losses are reported in earnings (net income). The fair value of the financial instruments, the method(s) and significant assumptions used to estimate the fair value of financial instruments and a description of the changes in the method(s) must then be disclosed. In Exhibit II, we compare the optional treatment Today’sCPA

under this statement with the previously required treatment of SFAS 115 for trading securities, available-for-sale securities and held-tomaturity securities. Let’s take a look at a brief example showing the basic journal entries under this statement. Suppose a company holds available-forsale securities at a cost of $100. On Dec. 31, 2013, the fair value is estimated to be $118. An adjusting entry for the $18 difference would be made as follows: Fair Value Adjustment

Unrealized Holding Gain

The Fair Value Adjustment account acts as a plus (adjunct) to the Investment account, thus resulting in a balance sheet amount of $118, while the Unrealized Holding Gain account would be presented on the income statement as Other Revenue. It would, therefore, increase the net income by $18. Instead, if the fair value was only $95 on Dec. 31, the entry would be: Unrealized Holding Loss Fair Value Adjustment

5 5

In this case, the Fair Value Adjustment account acts as a minus (contra) to the Investment account, resulting in a balance sheet amount of $95 while the Unrealized Holding Loss account would be presented on the income statement as Other Losses. Thus, it would reduce the net income by $5. Pursuant to this statement, assets presented at fair value may be shown separately from assets presented at cost or they may be combined. If they are combined, the fair value (of the “fair value” assets) should be in parentheses. Exhibit III presents both of these options. In addition, as required by the statement, it also shows the reliability level (Level 1, 2 or 3) of the fair value inputs.

Recall that stock investments that carry significant influence (usually at least 20 percent ownership of a company’s outstanding shares) should be accounted for under the equity method. Can the fair value option be used for these investments? The answer is yes, and there are two ways to go about this. One is to use the equity method during the period and then make a fair value adjusting entry at the end of the period. Another is to ignore the equity method (use the cost method instead) and then simply record a fair value adjustment at the end of the period. Regardless of the method used, the balance sheet valuation and the income statement earnings will be the same. An example showing both methods is presented in Exhibits IVa and IVb. Thus far, we have discussed the provisions of SFAS 159 with regard to assets. But the same rules apply to liabilities. (Remember that there are two sides to every investment – what is a liability to the issuer is an asset to the investor.) Therefore, if a company elects the fair value option for its liabilities, they will be reported at fair value on the balance sheet, and any unrealized holding gains and losses will affect earnings on the income statement. Furthermore, the same footnote disclosures mentioned earlier for assets will apply here as well. The provisions of this standard are applicable to both for-profit and not-for-profit entities (with some modifications as described in 82510-15-7) and became effective for fiscal years beginning after Nov. 15, 2007. However, Proposed Accounting Standards Update (ASU) 2013-03, Financial Instruments (ASC 825) proposes to exempt private companies and nonpublic not-for-profit organizations from the requirement to disclose the hierarchy levels (Level 1, 2 or 3) “for items not measured at fair value in the statement of financial position, but for which fair value is disclosed.” Comments were accepted through Jan. 22, 2013.

The IASB Position International Financial Reporting Standard (IFRS) 13, Fair Value Measurement (effective date Jan. 1, 2013) has the same definitions/ scope related to the measurement as GAAP. ASC 820, however, includes guidance for valuing interests in investment company continued on next page

Exhibit I. Hierarchy of Ratings Level

Inputs

Examples

1 (best)

Quoted market prices in active markets for identical assets and liabilities.

Quoted stock or bond prices from a national exchange.

Quoted prices for similar assets or liabilities in active or inactive markets.

Market prices for similar assets recently sold or for buildings, price per square foot arrived from observable market information.

3 (worst)

Inputs that reflect the entity’s own assumptions Present value of expected cash flows using a credit about what market participants would use in adjusted interest rate. pricing the asset or liability. (These are used when little or no market activity exists for the asset or liability).

Note: Levels 1 and 2 are referred to by the statement as “observable” while Level 3 is referred to as “unobservable.” Today’sCPA September/October 2014

CPE ARTICLE continued from previous page Exhibit II. Comparison of SFAS 115 and SFAS 159 Treatment of Fair Value Measurement SFAS 115 Investment Type

Valuation

Unrealized Gains & Losses

Trading

Fair Value

Recognized in earnings

Available-For-Sale

Fair Value

Recognized in O.C.I

Held-To-Maturity

Amortized Cost

Not Recognized

Investment Type

Valuation

Unrealized Gains & Losses

Trading

Fair Value

Recognized in earnings

Available-For-Sale

Fair Value

Recognized in earnings

Held-To-Maturity

Fair Value

Recognized in earnings

SFAS 159

Exhibit III. Financial Statement Presentation

A company has two batches of held-to-maturity securities and two batches of notes receivable. One batch of the held-to-maturity securities is reported at fair value of $25; the other is reported at cost of $40. One batch of the notes receivable is reported at fair value of $12; the other is reported at cost of $32. The two alternative presentations are as follows:

Separate Line

Parenthetical

Investments at fair value: Held-to-Maturity

$25

Notes Receivable

$12

$37

Held-to-Maturity ($25 fair value)

$65

Notes Receivable ($12 fair value)

$44

Total

$109

Investments at Cost: Held-to-Maturity

$40

Notes Receivable

$32

Total

$72

$109

The reliability levels for the fair value securities are disclosed in the footnotes, as follows:

Investment

Fair Value

Level 1

Level 2

Level 3

Held-to-Maturity

$25

$14

Notes Receivable

$12

—

entities, while IFRS 13 does not currently provide investment company accounting guidance. International accounting requires investment companies to follow the same accounting standards as other companies. Both GAAP and international accounting require a narrative sensitivity analysis; however, IFRS 13 also requires that a quantitative sensitivity analysis be disclosed for Level 3 financial instruments. IFRS 13 affects: • International Accounting Standard (IAS) 39/IFRS 9, Financial Instruments. Financial assets, financial liabilities and some contracts to buy or sell non-financial items are initially measured at fair value. In subsequent years, the financial instruments should continue to be measured at fair value with some exceptions requiring cost. • IAS 16, Property, Plant and Equipment. This property is initially measured at cost, but in subsequent years is measured either using a cost or revaluation model. • IAS 38, Intangible Assets. Intangible assets are initially measured at cost, but in subsequent years are measured either using a cost or revaluation model. • IAS 40, Investment Property. This property is initially measured at cost, but subsequently measured either using a cost or revaluation model. The revaluation model calculation is based on IFRS 13 guidelines. IAS 17, Leases, IFRS 2 Share-based Payment and IAS 36 Impairment of Assets. These refer to fair value, but do not require adherence to IFRS 13 methods of calculating fair value. IASB is working on replacing IAS 39 with IFRS 9 after readdressing classification and measurement issues, and including requirements for the impairment of financial assets (measured at amortized cost) and for hedge accounting.

Audit Considerations With the convergence of Generally Accepted Auditing Standards (GAAS) and international standards, Auditing Standard (AU) 328, Auditing Fair Value Measurements and Disclosures, and AU 342, Auditing Accounting Estimates, were combined to create AU-C Section 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures of the Clarified Statements. AU-C Section 540 and the related international auditing standard ISA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related Disclosures both require: a. Risk assessment procedures and related activities: identifying and assessing the risks of material misstatement and planning the nature, timing and extent of audit procedures. b. Further substantive procedures to respond to significant risks. These may include the testing of management’s significant assumptions, the valuation model used, the development of independent fair value estimates or the reviewing of subsequent events. c. The evaluation of the reasonableness of the accounting estimates. This will involve the increased use of outside specialists (AU-C Section 620/AU Sec. 336, Using the Work of a Specialist). d. Disclosures related to accounting estimates to be adequate in accordance with the applicable financial reporting framework, including the method of estimation and significant assumptions used. Today’sCPA

e. Indicators of possible management bias in the determination of the accounting estimates. f. That the auditor’s work papers should support the auditor’s basis for reporting on the reasonableness of the accounting estimates and the adequacy of their disclosure. Written representation by management is required by the international standards within International Standard on Auditing (ISA) 540, but GAAS has included this requirement in AU-C section 580, Written Representations. The management representations should include why a particular valuation model was chosen, what assumptions were made and whether management believes the assumptions are reasonable. The auditor should also inform the audit committee of the process used by management in developing fair value estimates and the basis for the auditor’s conclusions regarding the reasonableness of those estimates in accordance with AU-C Section 260/ISA 260, Auditor’s Communication With Those Charged With Governance.

Accounting/Auditing Concerns Since in some instances the fair values may be based on information other than quoted prices (Level 2 and Level 3), there are concerns that the information reported may not be relevant or reliable and may be subject to manipulation, interpretation or bias. For example, Citigroup investors (In Re Citigroup Inc. Securities Litigation, 753 F. Supp. 2d 206; 2010 U.S. Dist.) claimed the company incorrectly calculated the fair value of the company’s collateralized debt obligations (CDOs) by using Level 3 inputs rather than Level 2 inputs. The plaintiffs in this ongoing case felt that a widely used CDO price index (considered Level 2 input) should have been used by Citigroup, but the company decided the index was not appropriate. Because of their complexity, there is no standard method of valuation for CDOs. In addition to potential legal issues related to non-Level 1 valuations, fair value estimates based on information other than quoted prices could reduce the usefulness of financial statement comparisons. Auditors do not have the necessary training to spot managements’ knowing and unknowing biases that may have entered into an item’s fair value evaluation (CFO.com [ June 7, 2007]), which may require the increasing use of specialists. Furthermore, during times of financial crisis, the market value of all assets may be written down. This could lead to more expensive borrowing fees and possible ratings downgrades. Webster’s dictionary defines accounting as the system of recording and summarizing business and financial transactions, and analyzing, verifying and reporting the results. Fair value accounting pulls accountants away from their traditional role based on actual performance to a new role based on expected performance. Financial statements traditionally reflect a company’s financial position at a point in time (which is verifiable), while the use of fair value has changed the view of financial statements to decision usefulness that is more difficult to verify (especially when assumptions and models are used in the valuation process). In another case, Bear Stearns (In Re Bear Stearns Companies, Inc. Securities, Derivative, and ERISA Litigation, 763 F. Supp. 2d Today’sCPA September/October 2014

Exhibit IVa. (Equity Method)

Company A (Investor) purchases 25% of the stock of Company B (Investee) for $100. During 2013, Investee earns $16 net income and distributes an $8 dividend, of which $2 goes to Investor. On Dec. 31, 2013, the fair value of Investor’s stock is $180. If Investor accounted for its stock under the equity method, its Investment t-account would appear as follows:

Stock Investment 100 2 *4 Balance 102 *This is .25 x 16. The Dec. 31 adjusting entry needed to bring the Investment account from $102 to $180 is $78, as follows:

Fair Value Adjustment

Unrealized Holding Gain

Thus, Investor’s balance sheet will show an investment of $180 and its income statement will show earnings of $82 (4 + 78).

Exhibit IVb. (Cost Method)

Let’s assume the same information as above, except that Investor used the cost method instead of the equity method. Its Investment account would have been untouched during the period and would appear as follows:

Stock Investment 100 The Dec. 31, 2013 adjusting entry needed to increase the account from $100 to $180 is $80, as follows:

Fair Value Adjustment Unrealized Holding Gain

80 80

Thus, its balance sheet will show an investment of $180, while its income statement will show earnings of $82 (80 + 2 dividend). Notice that regardless of the accounting method chosen by Investor, the balance sheet will show an asset of $180, and the income statement will show earnings of $82.

423; 2011 U.S. Dist.) used a valuation model to value mortgage derivatives. However, the model used to value Level 3 assets was 10 years old and Bear Stearns was told by the Securities and Exchange Commission (SEC) on several occasions that the model did not “assess the risk of default or incorporate data about such risk” nor did it account for changes in housing prices. The independent auditors were also part of this case since they gave an unqualified opinion on the company’s 10-K even though Bear Stearns’ assets were not properly accounted for or disclosed (according to the continued on next page 43

CPE ARTICLE continued from previous page plaintiffs). The complaint charged that the auditors disregarded red flags, such as ignoring that Bear Stearns used valuation models that the SEC had repeatedly criticized and did not adequately evaluate Bear Stearns’ internal controls. Fair value accounting makes the “bottom line” move up and down in uncontrollable ways, which are difficult to explain to stockholders (CFO.com, May 14, 2008). Using fair value accounting may also affect the comparability of financial statements, since one company may choose one method of pricing a financial instrument while another company may choose an alternate valuation method. Both management and auditors, placed on alert by the above cases, must be diligent in determining, documenting and disclosing the methodology used in valuing Level 2 and Level 3 assets.

Where Now? The article discussed some concerns inherent in fair value accounting. The question is: where do we go from here? As mentioned above, on the international accounting side there is one

project related to the measurement of financial instruments that is dedicated to replacing IAS 39 with IFRS 9. Re-deliberations by IASB and FASB of the Classification, Measurement and Impairments sections of IFRS 9 are scheduled for 2014. On the U.S. side, Accounting Standards Update (ASU) 2013-09 Fair Value Adjustments (ASC 820), related to the deferral of certain quantitative disclosures, is not expected to significantly change the core directives of the standards. The fundamentals of fair value accounting (both U.S. and international) and fair value auditing (both U.S. and international) were discussed in this article. Although the use of fair value accounting may lead to more realistic financial statements, accountants and auditors should be aware that the financial information may be subject to manipulation or bias by management and may require a different skill set by the accountant and auditor to ensure the financial statements reflect a clearer picture of the company’s health. CPAs should use the points in this article to continue to develop and expand their professional skills related to fair value. n

Professor Baruch Englard

is an associate professor of Accounting at the College of Staten Island (City University of New York). He is the author of two textbooks on financial accounting: Intermediate Accounting I and II, both by McGraw Hill. He may be reached at BaruchEnglard@verizon.net.

Professor Patricia Z. Galletta, MBA, CPA

is an assistant professor of Accounting at the College of Staten Island (City University of New York). She may be reached at pzgalletta@gmail.com.

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Today’sCPA

CPE QUIZ

By Patricia Z. Galletta, MBA, CPA, and Baruch Englard, MS, MBA, CPA

Fair Value Accounting: An Overview 1 If a company uses the fair value method for accounting for investments, where are changes in the fair value recognized? A. Other comprehensive income B. Retained Earnings

C. Earnings or Net Income D. Surplus

2 According to ASC 820, Fair Value Measurement, which of the following is true? A. The exchange price is “the price in an orderly transaction between market participants to purchase the asset or transfer the liability in the entity’s principal or most advantageous market.” B. A liquidation transaction is not an example of an orderly transaction. C. Fair value is an entity-specific measurement and not a market-based measurement. D. For recurring and nonrecurring fair value measurements within Level 2 and Level 3, the valuation technique (market, cost or income) used to determine fair value, explanation of the inputs used and a description of any changes in the valuation technique do not need to be disclosed.

3 According to fair value accounting and auditing standards, which of the

following is true?

A. Level 3 is the most preferred level since it uses quoted market prices in active markets for identical assets and liabilities. B. ASC 825 expands the use of fair value to assets and liabilities related to pension and postretirement benefits. C. IFRS includes guidance for valuing interests in investment company entities while GAAP does not currently provide investment company accounting guidance. D. Both the clarified auditing standards and the international auditing standards require risk assessment procedures and related activities.

4 All of the following are concerns about fair value accounting except: A. Using historical cost accounting will affect the comparability of financial statements. B. Fair value estimates based on information other than quoted prices could reduce the usefulness of financial statement comparisons. C. Fair value accounting pulls accountants away from their traditional role based on actual performance to a new role based on expected performance. D. In instances where the fair values may be based on information other than quoted prices, the information reported may not be relevant or reliable and may be subject to manipulation, interpretation or bias.

5 The three types of valuation approaches for measuring fair value are: A. B. C. D.

market, income and orderly. orderly, income and cost. market, income and cost. market, orderly and cost.

6 Which level of input used to determine fair value is the most reliable? A. Level 1

B. Level 2

C. Level 3

D. Level 4

7 Which would be the best definition of an exit price? A. B. C. D.

price that would be received to sell the asset or paid to transfer the liability. price paid to acquire the asset or received to assume the liability. fire or distress sale price. market approach price.

8 In conducting an audit, which of the following will require the increased use of an outside specialist? A. B. C. D.

Risk assessment procedures and related activities. Substantive procedures to respond to significant risks. Evaluation of the reasonableness of the accounting estimates. Adequate disclosures related to accounting estimates.

9 According to the Citigroup investors, the CDOs were valued using: A. Level 1 instead of Level 2 inputs. B. Level 2 instead of Level 1 inputs.

C. Level 2 instead of Level 3 inputs. D. Level 3 instead of Level 2 inputs.

10 Which of the following requires that a quantitative sensitivity analysis be disclosed for Level 3 financial instruments? A. B. C. D.

IFRS 13 ASC 820 IAS 39 ASC 825

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 October 31, 2014, to TSCPA for grading.

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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.

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Answers to last issue’s self-study exam: 1. A 2. C 3. B 4. C 5. B 6. A 7. B 8. B 9. B 10. A Today’sCPA September/October 2014

CLASSIFIEDS Positions Available IN DALHART TEXAS JUNIOR/SENIOR ACCOUNTANT WITH 5 YEARS MINIMUM TAX EXPERIENCE. Salary starting at $75k depending on experience plus benefits with partnership opportunity after proven success. Email resumes to chad@gaskillpharis.com or mail to Gaskill, Pharis & Pharis, LLP. PO Box 1060, Dalhart, TX 79022. LOCAL FIRM IN MT. PLEASANT, TEXAS HAS OPENING FOR AN ACCOUNTANT WITH 2 YEARS OR MORE EXPERIENCE IN TAX. General background in firm practice such as audit, write-up, etc. a plus. Comfortable, casual work environment in northeast, Texas. “FRIDAY AFTERNOONS OFF” half of the year. Email resumes to lwalker@awacpa.com. CPA IN HARLINGEN, TX SEEKS CPA OR CPA CANDIDATE WITH THREE PLUS YEARS PUBLIC ACCOUNTING EXPERIENCE IN INCOME TAX. Excellent partnership opportunity. Email resume to sdusek@bizrgv.rr.com. LOCAL CPA FIRM IN CORPUS CHRISTI, TEXAS IS SEEKING AN ACCOUNTANT WITH 3-5 YEARS OF PUBLIC ACCOUNTING EXPERIENCE IN AUDIT AND TAX. CPA or CPA candidate required. Excellent partnership opportunity, as senior partner plans on retiring in the next 3-4 years and we are in need of the right individual to take over his client base. Salary starting at $55K for the 3-year experience level. Compensation package includes paid vacation time, employee health savings account and retirement plan match. If you meet these qualifications, please email your resume to dmorales@gowland-cpa.com. WACO, TEXAS SENIOR ACCOUNTANT CPA WITH 3 TO 5 YEARS TAX EXPERIENCE. Competitive salary depending on experience plus benefits with Partnership opportunity after proven success. Email resume to frank@mts-cpa.com or mail to Metzgar, Traplena & Sullivan LLP, 4216 Franklin Avenue, Waco TX 76710-6944. OUR SMALL FAMILY ORIENTED TAX PRACTICE IS CURRENTLY SEEKING A TAX MANAGER WITH 8-10+ YEARS’ TAX EXPERIENCE AS A CERTIFIED PUBLIC ACCOUNTANT TO MANAGE MULTIPLE TAX ENGAGEMENTS AND TO DELIVER QUALITY TAX SERVICES FOR OUR CLIENTS. A long-term buy-in to become a member is a possibility. Competitive salary depending on experience plus benefits. Experience with ProSystem FX, ProSystem fx Document and QuickBooks is a plus. Experience in Public Accounting is a must. If you meet these qualifications, please email your resume to cpa@lockartcpa.com

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