AICPA CEO Predicts Major Tax Reform

Barry Melancon, AICPA president and CEO, expects to see passage of major tax reform legislation during the Trump administration, Accounting Today reported.

Democrats may help Republican lawmakers enact the reform if Republicans can build bipartisan support, Melancon said Jan. 24 at a meeting of the Accountants Club of America in New York.

“The reason for that is you have eight Democratic senators up for re-election in 2018 who now reside in states that voted for Donald Trump, so they will need politically to look for some things to be able to convey back home,” he said. “I think the potential for tax reform will fall into that. No matter who you are or where you are on the political spectrum, it’s pretty easy to beat up on the tax code and the IRS and certainly for those senators that would be the case.”

He continued, “The political winds are there for it to pass. In all likelihood, it will be the most significant piece of tax reform legislation since 1986, and all the CPAs in the room know very clearly what I’m talking about when I say that. It will be a very significant change if it goes through the process.”

Potential reforms include allowing the IRS to automate tax processing by using information returns, repealing the alternative minimum tax and the estate tax, and changing the rules for pass-through entities, reasonable compensation and foreign revenue.

“There is a lot of traction for 100 percent write-off of all depreciable assets, except land,” he added. “They’re even talking about 100 percent write-off of inventory from a business incentive or business-processing standpoint. You can also imagine some of the passive loss rules that exist in the current tax law and how they might play out in a transition situation.”

Read more. http://www.accountingtoday.com/news/aicpa-ceo-melancon-anticipates-major-tax-reforms

Connecticut CPA Pleads Guilty in Alleged Ponzi Scheme

Prosecutors say a CPA in Wallingford, Ct., faces up to 30 years in federal prison after pleading guilty to fraud and money laundering in connection with an alleged Ponzi scheme, Hartford Business.com reported.

Joseph A. Castellano has entered a guilty plea in federal court to one count of mail fraud and one count of money laundering, the Connecticut U.S. Attorney’s office said. Castellano is free on $250,000 bond, pending his Dec. 22 sentencing before U.S. District Judge Robert N. Chatigny.

He was arrested and charged in April with fraud and money laundering offenses stemming from an investment scheme that defrauded more than 10 individuals of more than $1.5 million, prosecutors say.

Castellano used clients from his tax preparation business to offer financial services and investment opportunities, according to the investigation.

No actual investments were made, the indictment says, and the money was not invested with or loaned to other clients of Castellano. He allegedly diverted the funds for his own use and benefit. Castellano also allegedly made false statements to certain victim-investors to explain various delays in the purported interest payments, prosecutors said.

KPMG Tax Partner Accused of Insider Trading

The SEC has accused a tax partner of New York-based KPMG (FY15 gross revenue of $7.9 billion) of alerting his broker to three pending mergers involving clients of the firm. A friend of the broker allegedly profited by more than $110,000, CFO.com reported.

The SEC asserts in a civil complaint that Thomas Avent specialized in M&A due diligence at KPMG, giving him access to “some of the most valuable, sensitive, nonpublic information that exists within the sphere of the stock markets.” The SEC states, “Through his work, Avent learns secret, proprietary, carefully guarded information about upcoming corporate acquisitions, including tender offers for publicly traded companies.”

In 2011 and 2012, the complaint says, he provided advance information about three deals to broker Raymond Pirrello, who then passed the tips on to Lawrence Penna, a former colleague and longtime friend.

“As a result, Penna got an illegal jump on other investors, and he and his family made over $111,000 in illicit insider-trading profits,” the SEC said.

Avent, Pirrello and Penna are all accused of insider trading. According to the SEC, Pirrello rewarded Avent by paying him $50,000 in cash, providing him with investment advice and servicing his brokerage account, and arranging for another of his clients to buy an illiquid $250,000 investment that Avent wanted to sell.

KPMG said it was “deeply troubled” by the allegations and had placed Avent on administrative leave, according to CFO.com.

The alleged tips to Pirrello involved NCR’s 2011 purchase of Radiant Systems, TBC’s 2011 acquisition of Midas Incorporated, and Ingram Micro’s 2012 takeover of BrightPoint. Both NCR and TBC were clients of KPMG and the firm provided advice to Tech Data, which had also considered acquiring BrightPoint.

The SEC said Pirrello also used the information he received from Avent to recommend the target companies to other associates, who then bought shares in those companies in advance of the deal announcements.

AICPA’s Melancon Sees Many Roles for CPAs in Battle Against Cyber Crime

Cyber crime has emerged as a leading financial and operational risk for all organizations of all sizes in all sectors, the AICPA says.

“With that in mind, the AICPA is taking a multi-faceted approach to cybersecurity through the work of the Assurance Services Executive Committee and the Center for Audit Quality. This work will allow CPAs to take a leadership role,” AICPA President and CEO Barry Melancon explains in a new video.

The SEC has acknowledged publicly that the accounting profession’s experience with integrating data, reporting and assurance puts CPAs in a unique position to assist organizations as they address their cybersecurity concerns. “But this is not just a public company issue,” says Melancon. “It affects businesses of all types, shapes, and sizes.”

The AICPA is already seeing explosive growth in the need for cybersecurity-related services that build on the foundation for Service Organization Control, or SOC, reports. “This demand is driven by market forces, not a government mandate. And the market is asking us to do more, from both the advisory and assurance perspectives,” Melancon says.

In response to the cyber challenge, the AICPA is taking action on many fronts:

  • First, the Institute is developing timely tools and education for CPAs to successfully address risk in a number of areas. Simultaneously, various areas of the AICPA are working to help CPAs as they address cybersecurity concerns through services like advisory, assurance, tax and management accounting.
  • Second, the AICPA is looking at how the profession can address cybersecurity as a natural extension of the platform of services CPAs already perform. The Institute is developing new examination engagements for members in public practice that are specific to cybersecurity. One is on an entity’s cybersecurity risk management program; another covers supply chain management for vendors and business partners to assess and manage their cybersecurity risk.
  • Third, the Institute’s advocacy team is closely monitoring cyber-related legislative and regulatory developments in Washington so it can respond appropriately and keep members informed.

“We see numerous roles for CPAs in the battle against cyber crime,” Melancon went on to say. “Within their businesses, CPAs must present their own front line against cyber attacks, implementing controls that help protect data and prevent service disruptions. CPAs in business can use their knowledge of the organization to advise their employers on administering a cybersecurity risk management program and provide the best cyber solutions. CPAs in pubic practice, or public accounting, can assist their clients in an advisory capacity, as they grapple with cyber concerns and provide assurance when needed.”

For more information, visit the AICPA’s Cybersecurity Resource Center: http://www.aicpa.org/InterestAreas/FRC/AssuranceAdvisoryServices/Pages/cyber-security-resource-center.aspx

AICPA Responds to Department of Labor’s Overtime Rule

The AICPA issued the following statement by president and CEO Barry Melancon in response to the U.S. Department of Labor’s rule amending Fair Labor Standards Act exemptions from minimum wage and overtime requirements:

“The AICPA has clearly and consistently outlined its concerns that the Department of Labor (DOL) proposed rule will increase the administrative burden in complying with the regulations while dramatically increasing employers’ payroll costs.

“The proposed revisions fail to modernize or streamline the regulations, are not reflective of the realities of the modern workplace and a changing workforce, and would adversely affect both employees and employers. DOL’s modifications to the rule did little to lessen the likelihood that CPA firms and countless other businesses will be forced to curtail hiring – and may even have to reduce the size of their workforce.

“The changes would have an especially negative impact on smaller accounting firms and the millions of small business clients they represent that simply cannot afford to raise their salaries for exempt employees above the new proposed threshold but also cannot afford to pay overtime to exempt workers.

As a member of the Partnership to Protect Workplace Opportunity – a diverse group of stakeholders including businesses and associations that represent millions who could be impacted by the proposed rule – we urge Congress to intervene in the process so that regulations governing overtime pay reflect the evolving workplace in a manner that is not economically counterproductive.”

AICPA Urges Senators to Maintain Availability of Cash Method for Accounting Firms and Others

The AICPA encouraged members of the Senate Finance Committee to preserve the use of the cash method of accounting for tax purposes as they ponder business tax reform.

In a letter submitted for the record of the committee’s hearing on “Navigating Business Tax Reform,” AICPA president and CEO Barry Melancon wrote, “As the committee drafts its proposals, we urge maintaining the current availability to use the cash method of accounting for pass-through entities and personal service corporations, such as accounting firms. Determining taxable income under the cash basis is simple in application, is a method of accounting which the service industry has used for decades, and must remain an option for these businesses.”

The letter explained that under the accrual method, many accounting and other service-type firms would need to accelerate a significant amount of income into the current taxable year despite not receiving the actual payment from their clients. This increase in tax liability could have a significant negative impact on a new owner’s ability to finance entrance into a partnership. Additionally, limiting the use of the cash method may result in the requirement of a CPA to take out a personal bank loan for the sole purpose of paying his/her increased tax liability. In addition to income tax consequences, some partners would also pay more self-employment taxes under the accrual method. Further, the AICPA believes a gross receipts restriction on the use of the cash method would unfairly impact accounting firms and could threaten their ability to expand.

“The AICPA has consistently supported tax reform efforts that promote simplicity and economic growth and do not create unnecessary administrative and financial burdens on taxpayers,” Melancon wrote. “An accrual method mandate falls short in that regard. We strongly urge retaining use of the cash method of accounting.”

Financial Fraud – Definition, Detection and Prevention

By: Yigal Rechtman, forensic principal, Grassi & Co.

Yigal Rechtman

Yigal Rechtman

In today’s complex economy, fraud schemes are growing more sophisticated, and the costs to both avoid and repair the damage higher. With cloud technology and weak cybersecurity threatening every business worldwide, the white-collar criminal of the future will be more armed and ready to fire than ever before. In 2014, roughly 40 million people in the U.S. were affected by identity theft and cybercrime alone is already costing the U.S. economy as much as $400 billion a year and as much as $1 trillion globally, according to a study released in 2014 by McAfee and the Center for Strategic and International Studies

The cost of financial reporting fraud (“management fraud”) costs about $1 million per incident, while occupational fraud costs roughly $150 to $200,000 per incident. Losses due to fraud cost an average of 5% of gross profit and take around 24 to 36 months to discover—usually via a tip (40%), by accident (20%) or during an audit (10%).

So what is fraud and why do people commit it?

Fraud is the intentional deceit of a material fact causing damage to its victims and benefiting the perpetrators. Fraud is generally classified as: occupational fraud, financial statement fraud and corruption—usually by an official. The more dissatisfied an employee, the more likely he or she will engage in fraud. There is a triangle theory of fraud by famed criminologist Donald Cressey to describe why people commit fraud: a person under pressure, due to a financial problem, will find an opportunity, a way in which to use his position to solve his problem, and then will rationalize, justify, the crime in order to make it acceptable. Most fraudsters are first-time offenders with no criminal past and do not see themselves as criminals; rather, they see themselves as ordinary, honest people who are just in a bad set of circumstances.

How can fraud be detected?

When there is a predication (i.e. a tip) of fraud, fraud examiners typically start with top-level analysis, looking for outliers in the results (excessive voids, missing documents, excessive credit memos, increased reconciling items, adjustments to receivables or payables, duplicate payments and ghost employees are just some examples.) Top-level analysis is the comparison of plausible relationships between balances and noting any unexpected results.

How can fraud be prevented?WP-Scam-Alert-red-black-white-sign

The best defense against financial fraud, especially financial report fraud and occupational fraud, is through the development of strong internal controls.

  • Segregation of duties: having more than one person performing or completing a task is a deterrent as the work of one individual is either independent of, or serves to check on, the work of another.
    • Custody or monitoring of assets
    • Authorization or approval of related transactions affecting those assets
    • Recording or reporting of related transactions
  • Reconciliations: these should be completed by an independent person who doesn’t also share bookkeeping responsibilities or check signing responsibilities.
    • Examine canceled checks—authorized signatures, appropriate endorsements, recognizable vendors, check sequence.
  • Physical security: access logs, video cameras, keyed entries
  • Pressure: perform periodic credit reviews and add a right to audit clause to the contracts. This not only gives the party the right to audit, it also sends the right message.
  • Provide training to your employees regarding the rationalization factor of committing fraud.

The most effective way to prevent fraud is to understand and fix internal controls, however, the bottom line to your bottom line is this: even the best systems of internal control cannot provide absolute safeguards against irregular activities.

For more information on how you can help fight fraud, contact Yigal Rechtman of Grassi & Co. at yrechtman@grassicpas.com.

NY Senate Mulling Bill to Allow Non-CPAs to Become Partners

Supporters of a bill to allow non-CPAs to be made accounting firm partners in New York are making another attempt at passage.

The bill language was not included in the state budget passed April 1. It had been included in Gov. Andrew Cuomo’s executive budget and the state Senate’s budget, but backers are seeking approval so that non-CPAs will be allowed to own a minority stake in firms that meet certain conditions, the Albany Times Union reported.

The legislation says that a simple majority of the ownership of such a firm must be CPAs registered in a state (not specifically New York) and the firm’s name cannot include “certified public accountant” or “CPA.”

Supporters argue that accounting firms need more than just CPAs, but IT and other specialists who should be allowed to be admitted as partners and receive the compensation and prestige that goes along with the title. They also say that New York is one of only three states in which 100 percent of an accounting firm must be owned by CPAs. Delaware and Hawaii are the others.

“This is a no-brainer for New York,” state Business Council President and CEO Heather Briccetti said, according to the Times Union. “Enacting Non-CPA ownership legislation will create jobs and help strengthen the economy. It will also bring New York in line with the 47 other states who have already passed similar legislation. We are disappointed that the issue was not resolved in the budget, but with 65 sponsors in the Assembly and support from the Senate and the administration, we are confident Non-CPA ownership will become a reality for New Yorkers in 2016.”

While the governor and Senate included the language in their budgets, the Assembly left it out of their corresponding one-house budget language. Still, a standalone piece of legislation that would make the same change boasts 63 Assembly sponsors, many of them majority Democrats, the newspaper reported.

Assembly Democrats maintain an internal conference rule that if there are not 76 Democratic supporters of a bill, it won’t come to the floor for a full vote.

AICPA Urges Congress to Pass Mobile Workforce Bill

AICPAThe AICPA has testified before a Congressional committee in favor of simplifying confusing state income tax rules.

At an April 13 hearing before the House Small Business Committee’s Subcommittee on Economic Growth, Tax and Capital Access, the AICPA urged passage of the Mobile Workforce State Income Tax Simplification Act of 2015.

“We believe the bill is an important step toward state tax simplification for small businesses,” Troy Lewis, chair of the AICPA Tax Executive Committee, told the subcommittee. “It would provide relief, which is long overdue, from the current web of inconsistent state income tax and withholding rules on nonresident employees.

“Having a uniform national standard for nonresident income taxation, withholding and filing requirements will enhance compliance and reduce unnecessary administrative burdens on businesses and their employees,” Lewis testified. “In addition to uniformity, H.R. 2315 provides a reasonable 30-day de minimis exemption before an employee is obligated to pay taxes to a state in which they do not reside.”

Lewis offered examples of why the rules are “burdensome and bewildering” to small businesses and their employees:

  • Some states tax wages even if the employee only works in that state for one day.
  • Some states provide a de minimis number of days or a de minimis earnings amount before employers must withhold tax on employees’ wages, but the thresholds are not consistent from state to state. For example, individuals are subject to state tax withholding after working 59 days in Arizona, 15 days in New Mexico or 14 days in Connecticut.
  • Some, but not all, states exempt income earned from certain activities such as training or attendance at meetings.  Furthermore, the exemptions sometimes only cover the employer’s withholding requirement. The employees may still be required to file or pay a tax in that state.

While about one-third of states have reciprocity agreements with bordering states to not tax the wages of another bordering state’s employees, Lewis noted that the agreements are primarily geared toward employees who ordinarily commute a few miles a day to a particular adjoining state. For example, he said, Virginia provides reciprocal withholding agreements with several states, but California, Kansas, Mississippi and New York do not have any reciprocity agreements.

Lewis said that the financial impact to most of these states is minimal. “After taking into consideration their costs for processing nonresident tax returns, we believe these states receive only a minimal benefit – if any – from forcing out-of-state employees to file a return for just a few days of work,” he stated.

Grant Thornton Reaches $4.5 Million Settlement with SEC

The SEC has announced that Chicago-based Grant Thornton (FY14 net revenue of $1.4 billion) and two of its partners agreed to settle charges that they ignored red flags and fraud risks while conducting deficient audits of two public companies that wound up facing SEC enforcement actions for improper accounting and other violations.

Grant Thornton admitted wrongdoing and agreed to forfeit approximately $1.5 million in audit fees and interest plus pay a $3 million penalty, the SEC said in a release

Melissa Koeppel was an engagement partner on the deficient audits of both companies, and Jeffrey Robinson was an engagement partner on one of the deficient audits, which spanned from 2009 to 2011 and involved senior housing provider Assisted Living Concepts (ALC) and alternative energy company Broadwind Energy. An SEC investigation found that Grant Thornton and the engagement partners repeatedly violated professional standards, and their inaction allowed the companies to make numerous false and misleading public filings.

By allowing a poorly rated partner to continue auditing a public company without sufficient supervision and oversight, “Grant Thornton prioritized the career of its partner and the retention of that partner’s clients over the interest of investors, with serious negative consequences,” Andrew J. Ceresney, director of the SEC’s division of enforcement, said in a Dec. 2 conference call with reporters, CFO.com reported.

In a statement, he says, “Audit firms must be held responsible when systemic failures such as inadequate engagement procedures, staffing, or supervision cause the firms’ work to fall significantly short of expected standards, particularly when multiple audits and engagements are involved. Grant Thornton was aware of red flags suggesting audit quality issues in the audits conducted by one of its engagement partners and its audit quality more generally, but failed to remedy the situation.”

Robinson has since retired from Grant Thornton, while Koeppel remains with the firm but in a non-auditing, non-partner role.

“We are pleased to have these several years-old matters resolved and we maintain a strong commitment to continually improving the quality of our work,” Grant Thornton stated.

Last December, the SEC announced fraud charges against two former ALC executives accused of making false disclosures and manipulating internal books and records by listing fake occupants at some senior residences in order to meet lease covenant requirements.  Earlier this year, the SEC charged Broadwind and senior officers with accounting and disclosure violations that prevented investors from knowing that reduced business was damaging the company’s long-term financial prospects.

“Grant Thornton auditors recognized that representations by ALC and Broadwind management were questionable.  Yet in the end, Grant Thornton accepted faulty explanations as the truth and failed to demonstrate adequate professional skepticism or obtain corroborating evidence,” says David Glockner, director of the SEC’s Chicago regional office.

According to the SEC’s orders instituting settled administrative proceedings:

  • In the ALC audit, Grant Thornton, Koeppel, and Robinson knew or should have known that heightened scrutiny was warranted with respect to the effects of ALC’s calculations of occupancy and coverage ratio covenants in a lease pursuant to which ALC operated eight assisted living facilities.
  • The firm and both partners were aware of repeated red flags surrounding ALC’s claim that it had an agreement with the lessor to meet lease covenants by treating ALC employees and other non-residents as occupants of the facilities.
  • They violated professional auditing standards by failing to take reasonable steps to determine that an agreement with the lessor existed or that ALC employees whom ALC claimed to be occupants of the facilities were actually staying there.
  • During the Broadwind engagement, Grant Thornton and Koeppel relied almost exclusively on unsupported management representations that a $58 million impairment charge had not occurred ahead of a significant public offering by Broadwind, even after learning of management’s own expectation of impairment and other facts establishing impairment.
  • Grant Thornton and Koeppel failed to obtain adequate audit evidence to support management’s conclusion that the impairment had occurred after the offering.
  • They also failed to exercise due professional care and skepticism or obtain adequate audit evidence related to a significant bill-and-hold transaction.  The revenue from this transaction allowed Broadwind to meet its debt covenants.
  • As a result of these and other deficiencies, Grant Thornton issued audit reports containing unqualified opinions on ALC’s 2009, 2010, and 2011 financial statements and Broadwind’s 2009 financial statements that inaccurately stated the audits had been conducted in accordance with PCAOB standards.

Without admitting or denying the SEC’s findings, Koeppel agreed to pay a $10,000 penalty and be suspended from practicing before the SEC as an accountant for at least five years, and Robinson agreed to pay a $2,500 penalty and be suspended from practicing before the SEC as an accountant for at least two years.