The Sharblog

New Year Prognostications

Well, it is a new year and I have been delinquent in blogging. A combination of the holidays, some vacation, a conference out of town and preparing for upcoming meetings got the better of me. Those are my excuses – legitimate or not. I have found in writing a blog for a few years now that it is a lot like exercising. You can always find an excuse as to why you are too busy to exercise. Or you can claim you don’t feel good or you are not in the mood to do it. The same is true of writing a blog. So I am climbing back on the wagon for my blog and, hopefully, I will get back into my routine.  

As we start a new year, it is a common time to make predictions and prognostications about various things. I thought I would go out on a limb and make some calls – professional, political and otherwise – just for the fun of it. Fortunately, my predictive powers are of no consequence other than how foolish I may look if most or none of them end up coming true. So here goes:

• The Financial Accounting Foundation (FAF) will end up adopting its proposal for a Private Company Standards Improvement Council (PCSIC) that will be subject to FASB. So there will not be a new independent board to establish standards or exceptions to GAAP for private companies. While this is not the outcome many wanted, it is still an improvement over the current situation and I am hopeful that with the increased focus and interest in this issue, some meaningful changes will actually start to occur for private companies.
• The SEC will not adopt IFRS for all U.S. companies, but will allow certain companies to use IFRS in making their filings. They will continue to encourage FASB and IASB to work on converging their standards, but they will support the U.S. maintaining its own standard-setting process.
• The Bush (actually they should now be the Bush/Obama) tax cuts/rates will not be renewed when they expire at year end. If Congress votes to extend them, the President will veto the legislation.
• President Obama will be re-elected with less than 50 percent of the vote. A third-party candidate will enter the race and affect the outcome.
• The Republicans will maintain their majority in the U.S. House of Representatives, but with a smaller margin.
• The Republicans will gain control of the U.S. Senate.
• The Texas Rangers will not make it back to the World Series. I really hope I am wrong about this one. But in the last 30 years, a team has gone to the World Series three consecutive years only four times. And only two teams have done it – Athletics and Yankees.
• The world will not end when the Mayan calendar does.
• Charles Barkley will regain some of the weight he has lost. Is anyone else tired of those Weight Watchers’ ads? And I like Charles!

Now on to exercising.

The Giving Season

Tis the season to be jolly – and to give gifts. The tradition of giving gifts at Christmas goes back centuries. Because gift-giving and many other aspects of the Christmas season involve heightened economic activity, among both Christians and non-Christians, the holiday has become a significant event and a key sales period for retailers and businesses. So Christmas is way beyond a religious holiday and has been for some time.

When I was a kid, the marketing for Christmas never started until after Thanksgiving. Now, you start to see Christmas advertisements and marketing right after Halloween, and Thanksgiving has been transformed into a major “kick-off” of the Christmas blitz. This year, there were a number of “Black Friday” events where shoppers went crazy. The economic impact of Christmas is a factor that has grown steadily over the past few centuries in many regions of the world. In the United States, it has been calculated that a quarter of all personal spending takes place during the Christmas/holiday shopping season.

While I personally do not care for the over-commercialization of Christmas that has occurred during my lifetime, the idea of gift giving is something I do like. I just think we have taken it “over the top” as we Americans seem to do with a lot of things.

It seems like giving is a human characteristic. We like to give gifts to others – those we know and those we don’t – because we like to make those we know and love feel good and we want to help those who are less fortunate than we are. Research shows that generosity directly benefits the well-being of those who give too, so maybe to some extent we also give to make ourselves feel good.

Research seems to confirm that proposition. One study from the University of British Columbia shows that people who give are happier than those who don’t. Even donating as little as $5 helped people feel better. A University of Oregon study showed that giving activates the same pleasure centers of the brain as receiving. And people who leave money to charity in their wills live three years longer than those who don’t, according to a U.K. study. (Our TSCPA Accounting Education Foundation would be happy to help you extend your life if you have an interest!) Other studies show a correlation between generosity and popularity. The more generous participants received more gifts back from others. So being generous and giving helps bring happiness, longevity and popularity if you believe the research.

But maybe we really didn’t need to do all that research. We could have just remembered what the fellow the holiday is named after said, “It is more blessed to give than to receive.”

Supreme Decisions

This week, the Texas Supreme Court ruled on the case challenging the constitutionality of the Texas business franchise tax (aka, Margins Tax). The Court decided that the tax is not unconstitutional, by a 7-2 vote.

Click here for the decision. 

The constitutional challenge to the law was filed by an insurance claims adjustment company – Allcat Claims Service. Allcat paid the tax in 2008 and 2009 under protest and then sued the Texas Comptroller to have the tax declared unconstitutional because it is unfairly assessed and imposes an illegal income tax on individual partners’ income. The Texas Supreme Court said the franchise tax is not an unconstitutional income tax because it is not assessed on individuals but on the business, which Texas law considers a separate entity. The Court said that lower courts would have to determine whether the tax was unevenly levied on Allcat.

So the overarching issue as to whether the franchise tax is constitutional has been decided. But that doesn’t mean the tax is well liked or concerns about it are going to go away. It has never raised the amount of revenue that many speculated it would when it was enacted by the legislature in 2006. Many small businesses don’t like it, feeling that it is too costly and complex. 

The current Speaker of the Texas House has charged the Ways and Means Committee with evaluating the franchise tax to determine whether it should continue to exist in its current form, a revised form or be repealed. The key questions then become: what are you going to replace it with to raise the necessary revenue for the state, and can you get enough political agreement on an alternative that will pass in the legislature? 

Meanwhile, another Supreme Court – this time the big one (U.S.) – will be deciding the constitutional fate of the Affordable Care Act (ACA) in its current session, most likely before next year’s election. Oral arguments for the case are expected in the spring. The law is being challenged by 26 states. The states are objecting to the ACA on a number of fronts, but opposition to the individual mandate to purchase health care coverage is the main thrust of their argument. They argue this violates the Commerce Clause of the Constitution. The Obama administration argues it does not. The administration petitioned the Supreme Court to take the case after an appeals court upheld a lower court ruling that the individual mandate is unconstitutional. Several other appeals courts have upheld the ACA as being constitutional. So there is divided opinion on the issue and the Supreme Court, as the final arbiter, will have to decide.

Cases of this magnitude in Texas and the U.S. bring our court system into greater light as the third branch of government. Some people don’t like that branch, but it is part of our governing structure, established by our founders. I guess that is why they put that word “Supreme” in the name, to help describe its importance. On cases like this, they certainly earn the label.

Global Playing Field

The stock market has been on a wild roller coaster ride in recent months with wide swings in value often from one day to the next. Most of the explanation lies in one word – “Greece.” Is it just me or is anyone else amazed that such a small country can have such a dramatic effect on U.S. and world markets? The population of Greece is about 11 million and its GDP is about $300 billion. 

The effect of Greece is just further proof that we are now in a global community where we are all interconnected  and what happens anywhere on the planet tends to reach us all eventually, whether it is business/economics, an outbreak of influenza or environmental factors. And the global community is changing. The U.S. and Europe used to be the “top dogs” in the global community, but now we are being challenged by some new up and comers in the likes of Brazil, Russia, India and China, commonly referred to as the BRIC countries. In 2000, the GDP of the BRIC countries was $2.7 trillion. In 2010, it had grown to $18.17 trillion. And future projections have the BRICs outpacing the GDP of the G-7 countries in about 20 years. So the playing field and playing conditions have changed drastically from what they used to be. As Dorothy said, “we are not in Kansas anymore” and we are not likely to go back.

That’s why I am amused when I hear people talking about how we need to go back to what it was like in the 1950s when the U.S. ruled the world in manufacturing and there were lots of great jobs for working-class people to earn a decent wage. While that all sounds good, we aren’t in the 1950s anymore. In the 1950s, the world had recently come out of World War II. Most of the developed world – Europe and Japan especially – had been devastated by the war. They had to rebuild their entire infrastructures, and they did so thanks to billions of dollars from the U.S. under the Marshall Plan and thanks to lots of “stuff” that we sold to them. During this time, we really didn’t have any competitors in building and manufacturing things. We dominated the world markets. Most of the BRIC countries were “third world” or close to it.

No matter how much we long for the 1950s – they aren’t coming back. We have to compete in the world in which we now live, and it includes other major players, including our new BRIC competitors. We are living and competing in a global economy with global markets, driven to a large extent by new technologies that did not exist 50 years ago. That doesn’t mean we can’t be competitive, just that the world is different and it will require new ways of effectively competing. The first step is acknowledging that fact and then setting out to do the hard work to be successful in that new environment.

 

In Good Hands

It has been a busy few weeks of meetings. First, I attended the AICPA Leadership Conference and Council Meeting in Phoenix and then closer to home, I attended a session of our Young and Emerging Professionals Committee where they strategized about future direction and activities for TSCPA to serve this growing and important member segment.

A major impression I was left with after participating in these various sessions was that the accounting profession is in good hands (apologies to Allstate) and is preparing well for its future. Sure, everyone is sort of down right now because of the bad state of the economy and fear of what the future might bring. But while we can’t absolutely predict or shape our future, we can certainly try to be prepared for it, and that preparation is taking place on several levels within the profession.

At the AICPA meeting, we were updated on the AICPA Horizons 2025 Project. This effort was designed to look out into the future (15 years) and provide a roadmap for the profession to help maintain and achieve success. The Horizons Project, with input from thousands of CPAs from around the country, identified the core values and core competencies of the profession.

Core Values: integrity, competence, lifelong learning, objectivity, commitment to excellence, and relevance in the global marketplace.

Core Competencies for CPAs to thrive in the future: communication skills, leadership skills, critical thinking and problem-solving, anticipating and serving evolving needs, synthesizing intelligence to insight, and integration and collaboration.

Some of the key learning points from the Horizons Project are:

• It is a small world after all – every business is becoming global.
• The future is here – embracing the future now will ensure viability in the long run.
• Change is inevitable – technology already is changing the way we work – and will continue to do so.
• Generations are working side by side – Baby Boomers are not retiring and Millennials are bringing a new set of skills and ideals to the workplace.

I got to see some of these Millennials in action at a strategic planning session of TSCPA’s Young and Emerging Professionals Committee this week. They spent a day talking about the strengths and weaknesses of this generation and how TSCPA could utilize their talents to make the Society a better organization that more appropriately serves their needs. The dialogue and brainstorming that took place at this session was impressive. It is clear that this generation is bright and motivated to succeed.

In sports, you need to have a good game plan and good players to win. I think the same applies to the profession. The Horizons Project is the game plan for the profession and our young CPAs are the players we will have to execute it. In looking at both, I like our odds for the future.

(As I write this blog, it is the afternoon before game six of the World Series. So I would be remiss if I did not give a shout out to the American League Champions. Go Rangers!)

One Size Syndrome

Last week, the Financial Accounting Foundation (FAF) issued a proposal to create a new Private Company Standards Improvement Council (PCSIC) responsible for determining whether exceptions to GAAP should be allowed for private companies in appropriate situations. Any recommendations from this new PCSIC would have to be ratified by FASB before they would become effective. 

This proposal runs counter to what was recommended by a Blue-Ribbon Panel on Private Company Financial Reporting (BRP), sponsored by AICPA, NASBA and FAF. The BRP recommended a separate board be established under the auspices of FAF, but with standard-setting authority independent of FASB. TSCPA was also supportive of a separate board and along with thousands of CPAs and financial statement users, encouraged FAF to adopt the BRP’s recommendations.

In issuing the proposal, the FAF trustees concluded that “creating a separate standard-setting board for private companies would likely lead to the establishment of two separate sets of U.S. accounting standards—a so-called “little GAAP” for private companies and a “big GAAP” for public companies, which is not a desired outcome.”

So let me see if I have this right. If we create a new PCSIC under the control of FAF to recommend to FASB when and where there should be exceptions to GAAP for private companies, then we will preserve the purity of GAAP. But if we have a separate board under the control of FAF, do the same thing without getting FASB approval, then all bets are off; GAAP will be diminished and the world will end as we know it?

Talk about form over substance. It is hard not to read this proposal and think anything other than “politics and turf protection for FASB.” The logic is otherwise elusive.

FASB has always had the authority to allow exceptions to GAAP for private companies, but they have chosen not to do so – in the name of uniform GAAP purity I presume. So why would I think a lot is going to change under this proposal, especially if the driving motivator is to avoid the appearance of different standards?

One size rarely fits all. And to force all companies – public and private – to use the same standards, whether they make sense or not, is myopic thinking. The focus should be on developing the best and most appropriate standards for the different types of business entities and the users of their financial information. Likewise, it is difficult to serve more than one master. In the case of FASB, the primary focus should be on public companies. It will be a challenge for them to do that well and also give fair consideration and attention to private companies. A separate board with a separate focus could. It’s too bad that FAF did not see it that way. 

FAF is accepting comments on this proposal until Jan. 14, 2012. If you are interested, please provide your input. You can get a copy of the full report by going to the FAF website at:  www.accountingfoundation.org.

Survey Says

How much of your tax dollar do you think the government wastes? According to the results of a Gallup survey issued last week, most Americans think the answer is 51 cents of every dollar. This is the first time since Gallup started asking this question in 1979 that Americans believe more than half of federal spending is wasted. The low point was 38 cents in 1986. And most Americans believe that the federal government is the biggest “waster” compared to state and local governments, where they estimate the waste at 42 cents and 38 cents respectively, reinforcing that most Americans have greater trust in government the closer it is to them.

This Gallup survey correlates with another survey done last year by the Pew Research Center where just 22 percent of Americans said that they can trust the federal government almost always or most of the time. This is among the lowest such measures in half a century. A dismal economy, an unhappy public, partisan-based backlash and discontent with Congress and elected officials in general have created what Pew called "a perfect storm of conditions" associated with distrust of government.

Moving to approval ratings of President Obama and Congress, we don’t see much better results. The president’s latest Gallup job approval numbers are at 41 percent approval and 50 percent disapproval. Congress comes in at an amazing 15 percent approval and 82 percent disapproval. 

So this is where we are now. Most people don’t trust their government and they think it’s wasting a significant amount of the money we send it as taxpayers. This is not a good place to be as a country. And I don’t care what party you support. While I don’t have any survey results to back it up, my hunch is that things aren’t a whole lot better in other countries around the globe. From reading the newspaper and watching TV, our European counterparts don’t seem to have a high level of public admiration either, and if you move to other parts of the globe – like the Middle East – outright insurrection and revolution are taking place. So the whole world population is in a funk right now about their governments and the leaders in charge. The current economic mess has a lot to do with it.

Yet, in this dismal environment we still have people who are willing to run for office in this country. Look at what’s happening with the race for the Republican nomination for president. It’s a huge field of candidates. (I personally hope it will get narrowed soon as it is difficult to keep them all straight. You almost need a scorecard!) It shows that no matter how bad it gets in America, there are always some men and women who believe things can get better, and who want to try and make it happen by serving in leadership positions. And that includes the current president. Let’s hope they are right and it happens soon. It can’t get much worse.

Strength in Numbers

This week, I began a one-year term as chairman of the Texas Society of Association Executives (TSAE). I am honored to have been selected for this leadership position and proud that it will allow me to represent TSCPA to the larger association community and world as a result. My service and participation in TSAE over the past several years has provided me with a wealth of knowledge and contacts with other association professionals that I firmly believe makes me a better CEO for TSCPA and a better person. In this blog, I thought I would share the three key message points I delivered to the TSAE members at our recent meeting. 

Be Proud You Work for an Association

 First, I told TSAE members that they should be proud to be working in the field of association management because of the important role that associations play in our society. And it is not a new role. Associations are part of the fabric of America. Forming associations is in our DNA as Americans. This has been true since the formation of our country.

Our founding fathers were brilliant when they embedded into our constitution the right of association of the people. And Americans have taken that right and used it to create what I think is one of the central strengths of our democracy – where the power is with the multitude and not a powerful elite. That is the central theory of association – the synergy that joining forces provides – allowing the group the ability to accomplish things that no one individual could. Simply put, it is “strength in numbers.”

Work to Make Associations Better

Next, I reminded my colleagues that we must strive to make our associations better. Sometimes we (myself included) who work in the association and non-profit community lapse into a mentality that because we are “non-profit” or “tax exempt” organizations that the rules are different for us. We feel we can’t compete with the rest of the profit-making world, or we don’t have to care about how we operate or try to be on the cutting edge or look for best practices to emulate.

That was never true and in today’s fast-paced world, it is a recipe and a mentality for disaster. Non-profit/tax exempt is just a tax status. It is not an excuse for poor performance or customer service. While we are not businesses, we need to operate in a business-like way, evaluating our programs and services on a regular basis – dropping those that are outdated and no longer worthwhile, eliminating “sacred cows”  and maximizing the use of the resources available to us to make our organizations best serve the needs of our constituencies.

Look to Your Professional Organization

 

To help on that front, I told my audience to look to TSAE, their professional association. That would be my same advice to CPAs and members of TSCPA – look to TSCPA, your professional association, for help. TSCPA is there to assist you in becoming a better professional, and you can obtain ideas and solutions for the day-to-day challenges you face in your own employment position and organization.

Lastly, let us know what you want from TSCPA. How can we serve your needs as members? Provide your input so we can help shape TSCPA to be the best association possible. TSCPA belongs to you – we want to make TSCPA the best it can be. We need your input and direction to achieve that goal.

Reference Points

Each August since 1998, Beloit College in Wisconsin has been issuing the Beloit College Mindset List. It provides a look at the cultural issues, events and people that have shaped the lives of students who are entering college. It was originally created to remind faculty members that they should be sensitive to using dated references that their students would not understand.

I have experienced this phenomenon when I am talking with members of the younger generation, which nowadays includes a whole lot of folks since I have reference points that probably make no sense to many generations. This is driven home when I use a colloquial remark like “that’s cool” or “that’s far out” or reference a TV show from the 50s or 60s. While those terms or references might make sense to fellow baby boomers, they are generally lost on anyone under the age of 50 to 60.

I have also seen this dated reference issue at work whenever my wife and I play the board game Trivial Pursuit Collector’s Edition with our adult children, and they don’t know the answers to many of the questions because the reference points  are 20-plus years old. Our children comically refer to it as the “old fogies’” edition!

We each have our own reference points established by our interaction with friends and other contacts, and by the cultural and historical events with which we have grown up. We need to remember this when we interact with others. What makes perfect sense to us may be a complete mystery to someone with different reference points.

Today’s entering freshman class was born 18 years ago (1993). Here are just a few of the things that distinguish them. If you would like to see the complete Mindset List, click here.

• There has always been an Internet ramp onto the information highway
• Ferris Bueller and Sloane Peterson could be their parents
• The only significant labor disputes in their lifetimes have been in major league sports
• They “swipe” cards, not merchandise
• There have nearly always been at least two women on the Supreme Court, and women have always commanded U.S. Navy ships
• Amazon has never been just a river in South America
• Refer to LBJ and they might assume you’re talking about LeBron James
• Women have never been too old to have children
• The Communist Party has never been the official political party in Russia
• “Yadda, yadda, yadda” has always come in handy to make long stories short
• Music has always been available via free downloads
• They’ve always wanted to be like Shaq or Kobe: Michael who?
• Grown-ups have always been arguing about health care policy
• Nurses have always been in short supply
• Refugees and prisoners have always been housed by the U.S. government at Guantanamo
• PC has come to mean personal computer, not political correctness

Here We Go Again

I am a big fan of Yogi Berra of New York Yankees baseball fame, who was known for uttering “Yogi-isms” that while sounding dumb, actually made sense if you thought about them. One of his famous one-liners is “it’s déjà-vu all over again.” 

Well this week, PCAOB decided that it’s déjà-vu all over again by issuing a concept release that proposes requiring public companies to change their auditing firms after a certain number of years. Comments on the release are due by December 14, so if you have an opinion you would like to share with PCAOB, you have some time to write to them.

The PCAOB chairman stated, “I believe that the long association of the largest audit firms with their major audit clients is an issue that must be addressed in order to fulfill the mission of the PCAOB. One cannot talk about audit quality without discussing independence, skepticism and objectivity. Any serious discussion of these qualities must take into account the fundamental conflict of the audit client paying the auditor. That leads to consideration of firm rotation as a counterweight to that conflict.”

Mandatory audit firm rotation is not a new idea. It has been discussed and debated since the 1970s. And there are some other countries that require rotation of audit firms. So PCAOB is certainly not plowing new ground here. But it was just a few years ago (2003), after the Sarbanes-Oxley law was passed creating PCAOB, that the GAO conducted a study on the potential effects of mandatory audit firm rotation.  Read it here.

In the study, the GAO said that mandatory audit firm rotation may not be the most efficient way to strengthen auditor independence and improve audit quality considering the additional financial costs and loss of institutional knowledge of the public company’s previous auditor of record. And audit failure rates have been demonstrated to be higher when the auditors are new and have not yet developed the institutional knowledge necessary for a comprehensive audit.

My concern is whether a mandatory audit firm rotation requirement will provide sufficient benefits for the costs involved. I also have a concern that if such a requirement was implemented, it would imply that PCAOB has solved the central conflict problem of the client paying the auditor. If you think an auditor can be compromised because the client is paying them, then I don’t understand how any term of service can overcome that concern. Couldn’t the audit firm be influenced at the beginning of the relationship as well as after a period of time?

Unless you eliminate the financial relationship between the client and the auditor, you will always have a conflict. But eliminating that conflict would be difficult unless you go to a completely new means of compensating the auditor. So there is no perfect solution. But then as Yogi said, “If the world were perfect – it wouldn’t be.” I look forward to seeing how this unfolds and where PCAOB ends up.