Fall 2013 AICPA Council Meeting

The AICPA held is Fall Council meeting in Los Angeles last week. In addition to electing Bill Balhoff Chairman for 2013-2014, a number of information and business items were discussed. We heard from the David Morgan on the release of the Financial Reporting Framework for Small and Medium-Sized Enterprises as a non-GAAP solution for reporting as well as from Billy Atkinson on the progress the Private Company Council for help to private companies in GAAP reporting. Finally, 40 years after the creation of the FASB, the profession is addressing the unique reporting needs of private companies.

There was an overview and breakout session on the future of learning commission. I addressed much of what was discussed in an earlier blog, but we also heard from Sal Kahn on the Kahn Academy. The Kahn Academy is a not for profit organization that may change the world. It all started when Sal Kahn wanted to help his cousin who was having trouble with math. It was inspiring to hear the success the Kahn Academy is having while at the same time realizing how humble Sal Kahn was and still is.

There has been a lot written about what the Kahn Academy is doing, but I think Sal put it best when he explained the real difference between how they taught through the Kahn Academy versus the traditional approach. In the traditional approach students spend a fixed amount of time on a subject with the variable being how much they learn as measured on a test – 100%, 90%, 70% etc. No matter how much or how little a person learns they move on to the next topic because they are following a strict time schedule. The Kahn Academy turns that paradigm on its head. They make the variable in the equation the time spent learning and the fixed measure the required knowledge before they can go on to the next topic. If you think about it this makes a lot more sense. In fact, it was the way things were done for centuries when students were taught in a one-on-one fashion. That model went out of fashion when we entered the industrial style of education putting dozens of kids in front of one teacher. The mass production model was more efficient in teaching the thousands of students to a basic level, but was not as effective in helping each student achieve their best result. Technology now let’s us combine the efficiency of the mass education model with the effectiveness of the one-on-one approach, and that is what the Kahn Academy is doing.

Finally we heard from the national commission on Diversity and Inclusion. One of the key deliverables from the commission will be a series of “play books” that firms and businesses of all sizes can use to become more diverse. The first will be delivered in the Spring of 2014 and will cover retention and advancement. If you are not on board with the imperative to become more diverse, then you need to research the coming demographic changes in U.S. In our lifetimes, the U.S. will become a majority minority nation. Even if you set aside client’s desire to work with diverse suppliers, you simply won’t have enough employees to successfully run your business if your staff does not become much more diverse – at all levels – than it is today. And its not immigration driving this – its birthrates – so even if you completely closed the boarder (which would do much more harm than good to the US economically) the demographic trends will still happen.

It is inspiring to see how seriously the Profession takes the need to change. I for one am very glad we are trying to proactively address the changing future rather than waiting for it to happen to us and be too late impact the results.

AICPA Spring Council Meeting

The AICPA had its traditional Spring council meeting in Washington at the beginning of a new Congress, this time the 113th Congress.  We now have 10 CPAs in Congress with two more added to the mix in the 2012 election. We got to hear from these two newest CPA members of Congress at the Council meeting.  As you would expect from CPAs they are looking for ways to get the financial mismanagement of the Federal Government back under control and accomplish some of those basic things like actually passing a budget and brining attention to the long-term structural issues that we have to deal with if we are to truly put the Federal Government on a sound financial path forward.  It was actually heartening to see that one was a Democrat and one was a Republican.  Our fiscal crisis is a crisis caused by both parties and it must be solved by both parties.  Listening to their down to earth problem solving analysis one has to wonder if we would even be in this mess if instead of having 10 CPAs and 225 Lawyers, we had 225 CPAs and only 10 Lawyers in Congress.

Members of Council from every state “went to the Hill” to meet with their Congressmen and Senators and ask for their support for three pieces of legislation.

  1. The Employee Mobility Act to set a safe harbor period of 30 days before an employee working in another state becomes subject to that state’s income tax withholding and reporting requirements.
  2. The Tax Return Due Dates Act which changes dues dates for several forms and puts them in a logical order so that forms that are needed to file subsequent forms, such as K-1s are due before the subsequent forms are required.
  3. The Municipal Advisor Act which would exempt CPAs doing normal CPA work such as compilations and assurance work would not be considered advisors to municipalities issuing bonds.

We also offered our help on tax reform with a number of common sense suggestions like bringing together the 15 different education credits and the many different deductions and exemptions into one coherent system.

We did take care of some business at the meeting too.  The council voted to authorize the issuance of AICPA credentials such as CFF, PFS, ABV and CITP outside of the United States (the CGMA is already offered across the world).  We will work with our partner CIMA and other national accounting organizations that have comparable ethics, education and other requirements to the AICPA.  This is a way to increase the value of these credentials for all of our members by making them valued around the world.

Finally I had the privilege of being part of a panel that discussed the CGMA credential.  What it means, what it is worth and what CGMAs bring to a business that is different from other “accountants.”  Serving on the panel reminded me of the great career I have had because I joined a profession that is willing to look to the future and make the changes to stay relevant in this ever changing world.

Going Global

The past week really brought home to me how international the profession of accounting is becoming.  I attended the International Federation of Accountants, Professional Accountants in Business committee meeting in New York and the Regional AICPA Council meeting in Atlanta.

The IFAC meeting really brought home that no matter where you work in the world, the U.S., Canada, Europe, India or Australia, the issues we are dealing with as PAIBs are the same.  We are dealing with investor demands for more information being fulfilled through standard setters and regulators.  We are dealing with risk management and internal control and the realization that as a business we have been organized to take risks – but as PAIBs we are being asked to monitor that risk taking to make sure the risks are known and within the corporate plans.  PAIBs across the world are being asked to be more than just good accountants; we are being asked to be strategic leaders in the business to deliver on business plans and ultimately the return to all stakeholders in the business.

The internationalization of the issues facing the profession was made even more apparent at the AICPA Regional Council meeting.  We spent half the meeting hearing updates about and talking about potential implications to the AICPA and our members of the various impacts of Internationalization.  Mandatory auditor rotation is just one such issue.  It is a purported solution to all the ills related to audits around the world.  Some areas see it as the solution to an apparent lack of competition among the audit firms.  Others see it as the way to give auditors backbones to stand up to unreasonable requests from the companies they audit – the theory is it is easier to say no if you know your going to lose the relationship after a few years anyway.  But whatever the problem, mandatory auditor rotation as the solution is gaining momentum due to an interesting dynamic – that everyone else is “doing it” so it must be good and we need to do it too.

This last point brings out the reason why it is important to talk with an be part of the international professional accountant community.  Some solutions are good and worth emulating.  Others, however, are not good at all and the misinformation being spread can only be combated by hearing the real story from our fellow professionals in those countries. I for one am glad the AICPA is focused on the internationalization of the profession and opening the lines of communications around the world.

October 2012 AICPA Council Meeting

I attended my last AICPA Council meeting as a member of the Board of Directors last week. While it was not quite as eventful as my first Council meeting it definitely had its moments.  The first Council meeting I attended was highlighted by the proposed move of the AICPA operations from New Jersey to North Carolina.  The Fall 2013 meeting covered issues from Private Company Financial Reporting to the National Debt Crisis to the AICPA’s pension fund impact on its finances.  I will discuss each of those in a little more detail below.

The Council heard from Billy Atkinson, Chairman of the newly formed Private Company Council (PCC). Billy has a long career serving private companies as a member in public practice, but also was one of two dissenting votes on the Blue Ribbon Panel recommendations.  FAF recently named him Chairman and Billy provided insight into his view of the work ahead for the PCC.  Billy pointed out that work on the framework for when differential standards should exist is a critical first step for both the FASB and the PCC.  When pressed on what types of differences he supports, Billy suggested that when it comes to measurement and recognition, any suggested changes may need to be made for all entities and it would be his inclination to first seek for the FASB to review the recognition and measurement issues overall.

We then heard from David Morgan, Chairman of the AICPA Financial Reporting Framework (FRF) Task Force which is creating a standards framework for Small and Medium enterprises.  The framework is essentially an enhancement of OCBOA, and will not be considered GAAP, but should offer a comprehensive reporting alternative for small private businesses that do not intend to go public someday.  Success of the FRF will depend on educating users – business owners and their bankers – of small business reporting on the higher usefulness of the FRF for small businesses.  You can expect to see an exposure draft covering the entire FRF in the next month.

Paul Stebbins reported on the escalating crisis around our national debt.  Did you know we are already on a trajectory that is worse than Spain, second only to Greece in the debt crisis triage center? Only record low interest rates are keeping our interest payments somewhat in check.  If we return to anything close to normal interest rates our interest payments will explode and we will quickly be paying over a trillion dollars a year in interest alone which doesn’t pay for a single program. 

There was also a discussion on AICPA finances that was focused mainly on the impact of the pension plan on AICPA’s reported results.  Like every organization with a defined benefit pension plan, declining interest rates have significantly increased the liability, and therefore deficit, reported by the AICPA.  This is a non-cash charge and even if interest rates never go back up, the ERISA required cash funding will be paid in over a number of years at a rate the AICPA can afford without negatively impacting the ability to serve its members.  The AICPA has already taken a number of proactive steps including freezing the pension plan starting in 2017, and will continue to look at additional alternatives to “de-risk” its pension plan in the future.

While this was my last Council meeting as a member of the AICPA Board of Directors, I was asked to serve an additional year on Council, filling the last year of a three year term ending in October 2013.  It was a privilege to serve on the Board of Directors and I am honored the AICPA wants me to stay involved at the Council level.  I look forward to continuing to update you on Council activities as well as the many issues impacting our profession into 2013.

Failure and Capitalism

Last week I updated you on the AICPA 125th anniversary and Council meeting that took place in Washington DC.  One of the benefits of meeting in Washington is that you have the opportunity to hear from a variety of regulators and politicians.  Senator Ron Johnson from Wisconsin addressed most of Council during the traditional PAC breakfast.  He made the statement that “Capitalism doesn’t work if you don’t allow failure.”

The problem we are dealing with as a society is that, with apologies to NASA, in some areas failure is not an option.  9/11 taught us that a single failure can cost thousands of lives. In a world with biologic and nuclear weapons, a single failure can be catastrophic.  But just like we have the difference between internal control over financial reporting and internal control over operations, there is a difference between the impact of failure over security and the failure of a business.

Internal control over financial reporting is all about minimizing risk.  Internal control over operations is different.  In business, the whole point of operations is about taking risk to make money.  The point of internal control is to make sure that the risks taken are known and within acceptable tolerances.   So, like financial reporting, risks over security only have one direction – minimization.  But like operations, for risks in our capitalistic economy, failure must indeed be an option – but with the appropriate controls in place to make sure those failures are kept within appropriate tolerances.

The danger we face today is that we will take the failure is not an option attitude to our economy.  We have major problems to deal with in order to permit orderly failures, but the answer would seem to me to continue to allow capitalism to do what it does best – allow failures.  If the risk of a business is too great to allow failure (to big to fail) then I submit the solution is not more regulation to prevent failure, but instead enforcement of existing or heaven forbid, creation of new rules to split businesses that are too big to fail.

This sounds more radical than what Frank-Dodd proposed, but in the defense of capitalism, I have come to the conclusion that being radical is what is needed.  And being radical means bringing back to capitalism its most basic control – the risk of failure.

AICPA 125th Anniversary

The AICPA celebrated its 125th anniversary during its Council meeting in Washington DC May 16 – 18.  Usually council meetings have a number of business issues to deal with and while we did take care of important business issues such as approving the budget (be on the lookout for those dues statements), this meeting was more celebration than business.  Typically celebrations focus on the past and while we did spend some time highlighting where we have been, most of the time was spent looking at where we are going – as auditors, tax preparers, management accountants and everything else we as CPAs do and will do in the future.

 The future of auditing, like the whole professional, is critically linked to our ability to attract bright people with the right character in order to continue to provide continuing and new assurance and audit services.  But one of the issues hitting auditors hard today is keeping people involved in and excited about a career in audit.  I, like many of my B&I colleagues, came into the profession as an auditor, but decided to take my career in the profession to a different path.  Keeping people involved and excited about this core service of our profession is critical to the future of the CPA profession.  Audits are the root of the profession and without a strong root system, all the branches we have built off that will come down when the tree topples over.

 We heard from George Colony, CEO of Forrester research.  He presented a fascinating look on what is going on in the world where business and technology continue to blend.  Mr. Colony talked about four thunderstorms occurring in the intersection between the technology world and the business world today.  Those storms are

  1.  Death of the Web
  2. Post Social World
  3. The Changing Customer
  4. Mobile Engagement

 The final topic from the Council meeting I want to cover here is the panel discussion on the future of financial reporting.  The most interesting point was a stat from the chairman of the IIRC.  In 1975, financial reports indicated 83% of the value of an enterprise. In 2009 that value indication was down to 23%.  Clearly there is a disconnect between what investors need to know and what we produce.  For those of us in the public company world this should be a call to action to move to something more relevant.  One possibility is the integrated report.  The idea is to combine critical financial and non-financial information in a single integrated presentation that will provide users of the report what they need to make investment decisions.  The IIRC is in the middle of a pilot program with 75 companies worldwide to see how this would really work and then intends to use the results of the pilot to develop guidance on what should be in and how to produce an integrated report. If you want to know more about the IIRC effort, check out their website at www.theiirc.org

 There was so much more covered in the council meeting, but I can’t do it all justice in this blog.  Check out all of the articles from the Journal of Accountancy at www.journalofaccountancy.com to get a complete review of the happenings at the May 2012 Council meeting.

March 2012 Regional Meeting of Council

The AICPA held its four regional meetings of Council over the last couple of weeks.  Regional meetings of Council are smaller assemblies that only members of Council attend (no guests or members of the press attend). This, along with the smaller meeting size, allows for greater and more frank discussion among members of Council.  The AICPA took advantage of this opportunity to have in-depth discussions on its strategic plan down to actual implementation initiatives.

If you are like many of us buried in work these days, you might have missed the impact the JOBS Act will have on our profession.  Dodd-Frank exempted public companies with a market cap below $75M from the section 404(b)  (obviously logic evaded congress as it is precisely these small companies that are most susceptible to fraud and the most in need of controls). Congress continued to defy logic by exempting new public companies for their first 5 years of being public from 404b if their market cap is under $750M  and their revenues are under $1B.  If that wasn’t bad enough, congress also decided to get into the accounting standard setting process. Under the act, new public companies that qualify for exemption from section 404(b) will be exempt from implementing any new accounting standards if the standard includes a delay in implementation for private companies.  Most new standards today include a delay for private companies, so this in effect delays all new substantive accounting standard changes for new public companies for the same period of time.  This is congress’s first successful attempt to set accounting standards since the exchange acts of 1933 and 1934 which gave the SEC standard setting authority (which the SEC then passed to the private sector for the most part). This is a dangerous precedent and we need to be on alert for additional attempts by congress to legislate accounting standards.  As vocal as I have been about the FASB, I still see the FASB as a far superior alternative to congress setting accounting standards. 

And a word for those opposed to differential standards for private companies. Where are your voices against this set of differential standards? Congress just set up a scheme for two different sets of standards for two different classes of public companies.  This makes even less sense given the users of new public company financial statements have the exact same needs as the users of existing public company financial standards. 

The exemption also applies to auditing standards.  There is a 5 year exemption from new auditing standards for companies meeting the 404(b) exemption threshold.  This may prove to be the most contentious exemption between a new public company and it’s auditor.  Auditing standards are essentially minimum requirements for an auditor to meet when performing an audit.  An auditor can (and should) go beyond the minimum requirements depending on the audit.  My guess is the auditor will often follow all current standards regardless of the exemption, but that sets up the contention.  I can see the discussions now between the business and the auditor with the business asking why certain procedures that are costing time and money are being performed when they are not required by the older auditing standards.  Even better, can you imagine the auditing standard on the auditor’s report being changed, but the business requesting the old report format be used because they don’t want disclosures required by the new report to be included.

There were a lot more topics covered in the meeting, but in keeping with the theme that the regional meetings are more private, I won’t go into them in detail in this blog.  I will, however, continue to keep you informed of the issues through this blog as they become public over the coming months during the April AICPA Board meeting and the May AICPA Council meeting open to the public.

AICPA Fall Council Meeting

I attended the AICPA Council meeting last week.  As expected a major topic of discussion was the FAF exposure draft on private company financial reporting, but before I get to that topic I want to list some of the AICPA’s accomplishments over the past year. The AICPA achieved record membership (372,000); Completed a major bylaw change better defining the categories of membership; Reached agreement with CIMA on forming a joint venture to issue the first Chartered Global Management Accountant credential; Successfully lobbied for the repeal of the onerous 1099 requirements and the elimination of the ability to patent income tax strategies; Resolved may problems with initial IRS proposals on Tax Preparer Registration; Completed the clarity project on auditing standards for private companies; Replaced and out of date and increasing unworkable SAS 70 regime; Successfully highlighted the CPA profession to the next generation resulting in record accounting majors and graduates; And completed an update of the vision for the CPA profession for the next 15 years.  I would like to highlight two of these accomplishments before I address Private Company Financial Reporting.


The new CGMA certification for CPAs with expertise in Corporate and Management Accounting is scheduled to make its debut on January 31, 2012.  The core purpose of a CGMA is to be “trusted to guide critical business decisions.”  This is what CPAs in B&I do everyday, but now we will have a credential to recognize the unique nature of that service and differentiate us from non-B&I CPAs as well as other “accountants” that work in business.  There are going to be additional focus areas on professional development, but it won’t be only about the individual CGMA taking the initiative.  Our joint venture partner, CIMA, has extensive experience in working with employers to set up development programs for finance departments and we intend to bring this expertise into the U.S. along with the CGMA. This will not only enhance the skills of CPAs in business, but also elevate CGMAs in the minds of one of the most important influencers on our careers – our employers.

CPA Horizons 2025

The AICPA has spent time working with thousands of our members to update the Vision of the future of the CPA profession during the past year.  The development has been a evolution of the existing vision rather an a revolutionary change in direction.  The core purpose for CPAs remains the same, “ CPAs…Making sense of a changing and complex world.”  In addition many of the core competencies such as Integrity and Objectivity remain the same.  Some, however, have changed.  For example, “technologically adept” is now gone as a distinct competency because the concept is so pervasive it now is really part of all of the core competencies.  The final report on CPA Horizons 2025 will come out after inclusion of additional feedback from Council obtained at this meeting.  Be on the lookout for it late this year.

Private Company Financial Reporting

As I reported in my last blog, FAF issued an exposure draft on private company financial reporting that did not follow the Blue Ribbon Panel recommendations.  The Council was extremely disappointed in the FAF and as a result passed the following resolution at the meeting.

“Be it Further Resolved, That because the Financial Accounting Foundation’s proposal does not contain the establishment of a board under the Financial Accounting Foundation empowered to set differences in U.S. GAAP standards where appropriate for privately-held companies, which is the preference of this Council, and if the Financial Accounting Foundation’s proposal is not modified to include such a board under the Financial Accounting Foundation, this Council directs the AICPA Board of Directors to consider all options, including consideration of other independent standard-setting bodies as the standard setter for U.S. GAAP for private companies, the creation of a committee or board within the AICPA or a standard-setting body as a separate entity, to develop private company generally accepted accounting principles (PCGAAP) or comprehensive private company-specific basis of accounting that would deliver meaningful, lasting improvement to private company financial reporting consistent with the Blue Ribbon Panel recommendations.”

Just to be clear, let me repeat a statement made by our new Chair-Elect Richard Caturano.  The AICPA Board, Council and members do not want to take control of private company GAAP.  What we want is a separate Board under FAF as recommended by the Blue Ribbon Panel sponsored by FAF, NASBA and the AICPA, but if the FAF refuses to follow those recommendations, the AICPA Council and Board will have to act accordingly.