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.

Accountant Gets Jail for Tax Refund Fraud Scheme

A South Florida accountant has been sentenced to six and a half years in federal prison after admitting to operating a $3.6 million tax refund fraud scheme, the Sun Sentinel reported.

Pamella Watson, 61, of Davie, Fla., who was a prominent figure in the Jamaican community, pleaded guilty earlier this year to a wire fraud charge. She has been jailed since her arrest in May.

Court records say Watson falsified hundreds of tax returns and refund amounts on IRS forms without her clients’ knowledge and diverted money to her own accounts and to her boyfriend.

A U.S. citizen who moved here in the 1970s, Watson ran her CPA business in Miami for many years and volunteered for many South Florida charities and organizations.

Watson’s lawyer Bruce Rogow said she already arranged to pay more than $1.5 million in restitution to the IRS, including transferring money from her native Jamaica. She owes a total restitution amount of more than $3.68 million. Rogow said she lost most of the money because she was a victim of a Ponzi scheme.

She sobbed in the courtroom as supporters asked the judge for leniency and apologized. “I’m really sorry for this mess I’ve created.”

Retired-CPA Status Proposal Up for Comment

The boards of the AICPA and NASBA are each proposing the creation of a new CPA status: “Retired-CPA.”

The boards have each approved that comments be gathered on the proposed changes to the Uniform Accountancy Act and the Model Rules. These changes would allow for the creation of a Retired-CPA status.

The AICPA says, “Currently, there is an Inactive-CPA status, which simply indicates that a CPA has chosen not to maintain the requisite amount of continuing professional education and can no longer hold out as a CPA while his or her CPE is not current. State boards have come to NASBA to request guidance on how to recognize both inactive and retired CPAs. With no uniform approach, a majority of states have adopted their own retired status in their statutes and/or rules. These variations in state policies have led to inconsistencies in expectations and treatment of this class of CPAs.”

Demographic changes are helping to propel the debate. The AICPA estimates that approximately 75% of its members will be eligible to retire by 2020. “Many of these retirees are well-respected business leaders in their communities who would like to find ways to continue to be of service, without necessarily remaining an active CPA in practice,” the AICPA says.

Read more details here: http://www.aicpa.org/advocacy/state/pages/retiredcpastatusexposuredraft.aspx

Comments on this proposal are requested by Feb. 2, 2016.

Court Ruling: AICPA Can Sue IRS Over Tax Preparer Rules

An appellate court has overturned a ruling made last year that stopped the AICPA from challenging the IRS’ new voluntary program to “credential” tax preparers, Forbes reported.

Initially, a U.S. District Court judge dismissed the lawsuit brought against the IRS after it announced implementation of its Annual Filing Season Program (AFSP). Under the AFSP, an uncredentialed tax preparer may opt to register with the IRS, take 18 hours of continuing education each year and sit for a comprehension test of 100 questions; in exchange, the preparer would receive a certificate of completion and be listed on the IRS website, the magazine reported.

The AICPA had initially called the program “unlawful and improper” and sent an opposition letter to IRS Commissioner John Koskinen. The organization voiced concern that the program “would cause significant legal problems that may ultimately frustrate the IRS’ goals, confuse the public, and lead to litigation” and alleged that the IRS did not have the statutory authority to move ahead with the program. In July 2014, the AICPA officially filed suit, calling it “an illegitimate exercise of government power.”

The IRS argued that the case should be dismissed for lack of standing, which refers to the legal ability of the AICPA to bring suit. The judge initially argued that the AICPA did not meet the criteria and thus, denied standing. The Appellate Court found, contrary to the earlier ruling, that the AICPA “ has adequately alleged the program will subject its members to an actual or imminent increase in competition” and thus “it therefore has standing to pursue its challenge.”

The IRS credential from the AFSP is intended to make preparers “stand out from the competition by giving them a recognizable record of completion that they can show to their clients,” according to the IRS. However, the AICPA says that this will “dilute the value of a CPA’s credential in the market for tax-return-preparer services” and permit unenrolled preparers to more effectively compete with CPAs. The appellate court found that the AFSP is “clearly intended to offer competitive benefits to those unenrolled preparers who participate in the program.” That competition could cause harm and therefore, the court reversed the lower court’s decision and agreed that the AICPA has standing to proceed.

Investors Looking to Ernst & Young to Recoup Madoff Losses

Nearly seven years after Bernie Madoff’s investment empire was revealed to be a $17.5 billion fraud, the battle by investors to recover their losses ramps up in a case that goes to trial this week in Seattle, the Associated Press reported.

A Washington state investment company is seeking to pin about $100 million of its losses from Madoff’s crimes on New York-based auditor Ernst & Young (FY15 gross revenue of $9.9 billion).

FutureSelect Portfolio Management of Redmond and some related firms, headed by hedge fund manager Ronald Ward, lost a total of about $129 million in the pyramid scheme. In court papers, the company alleges that Ernst & Young would have uncovered the scheme if it had taken even the most basic steps to verify Madoff’s assets – something the auditing firm denies it had any obligation to do.

“This case is about the Madoff fraud and how it got to Washington state and how it’s impacting real people in Washington state,” FutureSelect lawyer Steven Thomas told the AP. “Because Ernst & Young said the numbers were good, FutureSelect invested. Ernst & Young said over $4.2 billion in assets were real; they were fake.”

FutureSelect invested on behalf of other funds, retirees, a New York church and others, Thomas said. The investments were made in a collection of funds managed by Tremont Partners, which were invested with Madoff. Ernst & Young was the certified public accounting firm that audited Tremont’s funds from 2000 to 2003.

In a trial brief filed this month, Ernst & Young argued that it had a very limited role: to audit the financial statements for four of the 10 years FutureSelect invested in Madoff’s funds. Its audits, for which it was paid $40,000 apiece, were simply to provide “reasonable assurance” that Tremont’s financial statements were free of misstatements. Tremont’s financial statements said its funds owned securities in Madoff’s custody, which Ernst & Young said it confirmed by checking with Madoff.

Ernst & Young said its approach was consistent with that taken by every other auditor of every Madoff-advised fund.

And in contrast with the modest fees it received, the auditing firm said, Ward and Future Select received tens of millions of dollars in management fees.

Madoff revealed his fraud in December 2008, admitting that account statements showing clients held nearly $68 billion were a sham. The roughly $17.5 billion in principal invested by retirees, charities and other clients over decades was mostly gone – paid out as fake profits or raided by Madoff’s family and cronies.

Madoff, now 77, pleaded guilty to fraud charges a few months later and was sentenced to 150 years in prison. A federal trustee based in New York has recovered or made agreements to recover about $11 billion of the lost principal.

BDO to Pay $1.1 Million to Settle SEC Charges

The SEC has charged Chicago-based BDO USA (FY15 net revenue of $1.05 billion) with dismissing red flags and issuing false and misleading unqualified audit opinions about the financial statements of staffing services company General Employment Enterprises, the agency announced.

The SEC on Sept. 9 also charged five of the firm’s partners for their roles in the deficient audits, and filed fraud charges against the client company’s then-chairman of the board and majority shareholder Stephen B. Pence, who is a former U.S. attorney.

BDO agreed to admit wrongdoing, pay disgorgement of its audit fees and interest totaling approximately $600,000, and pay a $1.5 million penalty in addition to complying with undertakings related to its quality controls. The five partners also agreed to settle the charges against them. Two former CEOs of General Employment agreed to settle separate charges, and the litigation continues against Pence.

“Audit firms must train their audit and national office professionals not only to recognize red flags but also to have the resolve to refuse signing off on an audit if there are unresolved material issues,” Andrew Ceresney, director of the SEC’s Division of Enforcement, said in a statement. “BDO failed to do that here, even though these issues were elevated to the highest levels of its audit practice.”

According to the SEC’s orders instituting settled administrative proceedings against BDO and the partners:

  • Near the end of BDO’s 2009 audit of General Employment, BDO was advised by the company that $2.3 million purportedly invested in a 90-day nonrenewable CD wasn’t repaid by the bank upon its maturity date. BDO also learned that a bank employee indicated there was no record of a CD being purchased from the bank.  The $2.3 million represented approximately half of the company’s assets and substantially all of its cash.
  • BDO then received multiple conflicting stories from company management and board members about the status of the purported CD, and the company received a series of deposits totaling $2.3 million from three entities unaffiliated with the bank. One entity was purportedly owned by Pence.
  • After BDO raised more questions, the company claimed the deposits were proceeds of an agreement to assign the purported CD to an unrelated party in return for the value of the CD. But BDO never received reasonable and coherent explanations about why the $2.3 million went missing and why an equivalent amount was later received by the company under suspicious circumstances.
  • BDO’s engagement partner on the audit Sean C. Henaghan and concurring reviewer John E. Rainis subsequently consulted with senior BDO partners including regional technical director James J. Gerace, national director of accounting Leland E. Graul, and national SEC practice director Wendy M. Hambleton.
  • BDO then issued a five-page letter to the company highlighting the conflicting information and demanding an independent investigation overseen by the audit committee.
  • But just days later despite no reasonable explanation from the company, BDO withdrew its demand and subsequently issued unqualified opinions on the financial statements included in General Employment’s 2009 and 2010 annual reports.

Without admitting or denying the SEC’s findings, Henaghan, Rainis, Gerace and Graul agreed to be suspended from practicing public company accounting for varying periods, the SEC reported. Henaghan agreed to pay a $30,000 penalty, Rainis agreed to pay a $15,000 penalty, and Gerace, Graul and Hambleton each agreed to pay $10,000 penalties.