The missing piece in muni income tax discussion: Citizens

By Brendan Fitzgerald, CPA
2012-2013 Chair of the Executive Board

The Ohio Society of CPAs’ latest and profoundly important advocacy role has been focused on reforming Ohio’s complicated, burdensome municipal income tax structure through definitional uniformity. The OSCPA and its 19 statewide and local coalition partners have been working with state legislators for over a year to craft legislation that will simplify an onerous system that affects businesses and individuals alike.

Our effort does not include any attempt to affect the tax rates that a municipality may enact, nor the reciprocity credit or form of collection. Everything else is on the table for uniformity.

On the other side of the debate, the Ohio Municipal League (OML), representing the nearly 600 taxing communities in the State, is trying to exert its influence by shifting the focus of their opposition to income tax uniformity to the potential revenue impact they say such reforms would have on their member communities. We both are fighting for what we think is right for our respective constituents.

The one significant absence during the recent information-gathering meetings held throughout Ohio has been the voice of the people – the residents of the affected communities. What do they want?

The purpose of city government is to provide the essential services that residents demand but cannot provide for themselves, such as emergency services, public parks, utilities and waste disposal, libraries and road maintenance. These are hardly speculative ventures for cities to engage in, and the quality of such services represents a community’s – including individual and business taxpayers – “return on investment” for the taxes they pay.

Taxpayers also have strong opinions on how to best balance maintaining services people demand, keeping costs down and being treated in a fair manner.

Very early in my public accounting career, I was assigned to work with a business owner who was a sweet and gentle man until he talked about government. During one of those non-gentle times he said something that is worth repeating some twenty five years later. He said, “Before the government can give you anything, they first have to take something away from you.” I have used that quote many times over the years. From a municipality’s point of view, I could alter that quote to be, “before we can provide you with the services you demand, you must first give us the resources to provide them.” But if residents don’t speak up, their municipality will likely conclude that all are in agreement with their actions. That holds true with income tax treatment ordinances their city adopts.

So while we focus on simplification and uniformity to make Ohio more attractive to employers and easier for residents to comply, the OML’s opposition to true reform should not be based on the city’s perspective only. At the end of the day, government is accountable to all of us: individual and business taxpayers have also borne the brunt of recent economic difficulties. Many of us are simply unable to spare additional dollars without sacrificing necessities or simply closing our doors.

At some point cities will be unable to find any more room to punch another hole in an ever-tightening belt. We have every right to know how our tax dollars are spent, but we also need to recognize we should expect to pay for what we demand and can afford – and be remembered by cities as the source that makes all those services possible. Most people understand that some amount of tax is necessary for the collective good of a community. Whether the future is a regionalized shared-services approach or a menu-based choice of city services, the residents must decide what they want. Residents who don’t take the time to share their thoughts – through direct contact with city leaders or in the voting booth – can’t be surprised when decisions go another direction. That reality holds true in our current municipal income tax uniformity debate.

While the OSCPA and OML can find common ground on many of the specific reforms we support, there are still some hard decisions and compromise required to get meaningful municipal income tax reforms. OSCPA and its coalition partners have worked collaboratively with the OML and interested cities in an attempt to achieve consensus on definitional uniformity provisions, but there are several key issues where we had to agree to disagree. Ultimately, Ohio legislators will be the final decision makers – and they will depend on their voters and local elected officials to inform them of their views. You can be assured that many city officials are speaking out against municipal income tax uniformity. Are you countering that with your own experiences to help enact change?

Those who are impacted the most – the individual and business taxpayers – need to have their voices heard. We encourage you to do just that.

As I See It: What’s keeping CPAs awake at night?

by Clarke Price, CAE, President and CEO

I did something different during the Fall Professional Issues Update programs (PIUs). I asked members the question “what’s keeping you awake at night” and recorded the answers at each location. What I found was one overwhelming similarity with many different components.

The responses were varied:

• The economy
• The debt
• U.S. solvency
• The fiscal cliff
• Health insurance uncertainty
• The election
• Tax change uncertainty
• Municipal tax complexity
• Devaluation of U.S. currency
• Gridlock in Washington
• Retirement uncertainty
• Excessive regulation
• Non-CPA competitors
• Standards overload

The similarity I found was that almost all of the issues brought forth are beyond the control of any individual, or of any organization like OSCPA, to solve.

Frankly, this surprised me. What I expected to hear were practical issues like workload, managing generational differences, tax law complexities and changes in standards. While difficult to achieve, those are issues where we might collectively stand a chance of achieving meaningful changes or reforms that could resolve the frustrations members are feeling.

So what’s the takeaway from this exercise? What did I learn that can lead to success for OSCPA’s members?

The reality is that achieving change – meaningful change of the “big” challenges – takes time. OSCPA should focus on expanding the dialogue around these sorts of issues and promoting serious conversation about the need for change—just like we did when Ohio was facing an $8 billion budget shortfall. We need to engage more people in the conversation beyond just CPAs. We need to take these issues into the mainstream of conversation and promote action. For some of the issues, perhaps the solution is to demand change and be aggressive in carrying that message.

Many of the issues identified during the PIUs fall on the shoulders of Congress to solve. And in too many instances, we’ve allowed inaction by Congress to be accepted as the norm. We’ve accepted that inaction and gridlock by Congress is a situation that’s beyond our ability to control. But if we’re able to ramp up the volume among a broad audience, maybe, just maybe, we can get Congress to recognize that the status quo and petty bickering – or adhering to staunch ideological principles that keep progress from being achieved – just isn’t going to be accepted. That’s what I think it’s going to take to achieve meaningful change and progress toward the goal of resolution of many of these critically important issues.

That’s how I see it.

Some may agree, others may disagree. I encourage everyone to join the conversation. cp

Tune in to the live CPA Issues Forum video webcast Nov. 8 to learn more about these critical issues. You’ll have a chance to ask questions of Clarke and our panel of experts. It’s free and exclusively for OSCPA members. Register now.

As I See It: The Ohio Society of CPAs and Sherrod Brown

by Clarke Price, CAE, President and CEO

OSCPA’s candidate endorsement program began in 1992 and has been one of our most successful advocacy tools. While PAC donations are a big help and welcomed by candidates, the Society’s endorsement has value that can be more difficult to quantify. The bottom line is CPAs are respected and the public knows we don’t make any decision cavalierly. When we make an endorsement, the public has confidence that we’ve done our homework and considered multiple factors beyond a candidate’s likelihood of winning on Election Day.

The Society’s statewide candidate interview process is unique. The Statewide Endorsement Screening Committees consists of 18 members who collectively question each candidate in personal, one-hour interviews. That’s followed by extensive and very candid discussion of the candidate’s answers, as well as an analysis of his or her voting record and consideration of how that candidate has interacted with OSCPA representatives in the past. It’s this discussion that’s the most spirited. Frankly, you can’t believe what’s been said by some candidates over the years, and how they interact with the committee. Sometimes it just makes you shake your head wondering if they really understand what’s important to CPAs and the business community. The recommendations from the Statewide Endorsement Committee are then considered by the Executive Board, which makes the final decision. Unlike some think, the PAC has nothing to do with the Society’s endorsement evaluation process.

I’m sure the decision to endorse Sherrod Brown for re-election to the U.S. Senate will surprise some of our members. If you’ve paid attention to the multitude of TV ads that are running, you’ve seen him described as everything from the worst thing to happen to Americans to someone who takes his job seriously and is committed to making every decision with the best interests of Ohioans foremost in his mind.

One thing from the TV ads is true―Sherrod Brown has held elected office for a long time. The benefit of that is there’s a long list of votes on which his candidacy can be evaluated. And when it comes to votes on issues of importance to the CPA profession, he’s cast far more in support of our interests than against. I’m sure some will immediately argue that his vote for the Affordable Care Act should override all of his other votes, but we’ve always looked at the broad perspective of a candidate’s votes and we don’t focus on how a candidate voted on any single issue. The totality of that legislator’s record is one of our foremost concerns.

What does OSCPA actually care about when evaluating a candidate?

First, we care about access and whether the candidate has or will give us an opportunity to discuss issues that concern OSCPA and the profession. More than just about any other state or federal legislator we’ve worked with, Sherrod Brown has always gone out of his way to meet with Society representatives and to seek our opinion on issues. Frankly, he’s been a valued asset in executing our legislative strategies over the years.

Second, we care about how a candidate actually voted on the issues we’ve raised. Senator Brown has a long history of supporting our positions and during the 112th Congress he’s continued that record. AICPA has identified six bills in this session of Congress that have come through the Senate so far. His record includes being the lead sponsor on one of the bills, voting for four of the bills and helping us by keeping the last one from coming up for a vote. He’s had a consistent record on our issues and he’s deviated from the official party position on more than one occasion; on the issue of providing reasonable liability reforms to protect CPAs, while in the U.S. House, he cast the deciding vote to override a Presidential veto.

Finally, we care about fairness and supporting candidates who are willing to get out in front on tough issues. Sherrod Brown is seen by some as a lightning rod for controversial issues; that can’t be denied. But his passion and his willingness to listen to OSCPA and carry our message make him a logical choice for this endorsement.

I’m sure there are some who are reading this and thinking “what were the Endorsement Committee and Executive Board thinking when they made this choice?” Others likely have a reaction that’s significantly stronger. I can assure you the discussion in both groups was extensive and spirited. The pros and cons of endorsing each of the candidates were weighed and the votes overwhelmingly favored endorsing Sherrod Brown. I concur with that conclusion.

Keep in mind that our endorsements cover just a segment of the issues that are likely important to you as a voter, and our Election Guide is meant to be a valuable resource you can use in combination with others available to you. When it comes to this race, I encourage every member to consider the candidates, their records, their experience and then vote for the person that you think will be best for Ohio, for CPAs, and the best for you and your future. What’s most important is that we all vote―whether it’s in person on Election Day, during early voting or via absentee ballot. Your vote counts, so be sure to vote on Election Day.

Know your professional audience; your license might depend on it

By Brendan Fitzgerald, CPA
2012-2013 Chair of the Executive Board

The fact that you’re reading this column suggests you’re not the audience I’m trying to reach. But I hope you will continue to read nonetheless. I want to address our fellow CPAs who confuse The Ohio Society of CPAs with the Accountancy Board of Ohio (ABO).

It’s hard to believe, but it’s true. Spend any amount of time with an Accountancy Board member and they will confirm this happens often. During my term as chair-elect, I encountered CPAs who congratulated me on being elected by the members to serve, then followed up with a joke about knowing someone in power that could help them if they happened to have trouble with their license. Try as I might to explain the difference, I’m not sure the message was always received.

The Accountancy Board of Ohio issues your license to practice, and they can take it away. If you retain anything from this column, remember these two points:

1. Open and read any correspondence received from the Accountancy Board of Ohio.
2. Never utter the phrase, “But, I paid my dues to The Ohio Society of CPAs” while standing before the Accountancy Board during a disciplinary hearing. (There are worse things you could say, but that one certainly isn’t going to help your cause.)

What brings our fellow CPAs before the Accountancy Board for a disciplinary hearing? A variety of infractions or offenses can lead you to that point, yet all are avoidable. Do not misunderstand: some circumstances might converge to create an unanticipated problem for a firm or licensed practitioner. But if you reach the point where the Accountancy Board is discussing revoking your license and it is a surprise to you, the outcome will most likely not be in your favor financially, professionally or both. In your spare time, visit the Accountancy Board’s website and read through the meeting minutes posted. Some of the offenses could be categorized as accidental, some intentional and others originating out of naiveté.

One disturbing infraction often turns up during the audit of hours reported for continuing education and submitted by permit-holders when renewing their license. Audits by the ABO of CPE records result in a 3.3% failure rate in being able to document the number of hours reported by licensees renewing their permit to practice. A failure rate above 0.0% in a profession that is based on honesty and integrity is hard to fathom. The credibility afforded our profession, in some part, is being able to remove emotion from deliberations. When our peers are in harm’s way because of their own action or inaction, OSCPA can be supportive, but we cannot turn a blind eye to professional responsibilities. The Society is organized to support the profession and the public interest. The interests of those constituencies are not mutually exclusive. OSCPA will make every effort to help our members, but that doesn’t excuse our members from accepting responsibility for problems of their own making.

Because you are reading this in CPA Voice, you are a supporter of The Ohio Society of CPAs, and for that I thank you. I don’t have any statistics to shoehorn in here about whether firms disciplined by the board are supporters of OSCPA or the individual practitioners are members, but I suspect that a significant number are not. Being an OSCPA member does not guarantee that you will never appear before the Accountancy Board in a disciplinary hearing, but it does demonstrate a commitment to your peers and your profession. To paraphrase a comedian named Lenny Clarke, “If you like being a member of the OSCPA, tell your friends. If your friends don’t like being members of the OSCPA, get some new friends.”

IRS revokes part of Circular 230 and adds responsibilities to manager of tax function « E. Lynn Nichols, CPA

In a move some of us knew was coming, but really could not talk about, on September 14^th the IRS revoked Section 10.35 of Circular 230 and issued Proposed Regulations that strengthen Section 10.37.

There is now no reason (there probably never was, by the way) for CPA firms to have a “Circular 230 disclaimer” in their outgoing correspondence and e-mails. Those disclosures were an attempt to limit liability for tax advice that had nothing to do with Circular 230 in the first place.

Read the full post by E. Lynn Nichols on his blog:

IRS REVOKES PART OF CIRCULAR 230 AND ADDS RESPONSIBILITIES TO MANAGER OF TAX FUNCTION « E. Lynn Nichols, CPA.

Are we closing the GAAP on differential standards?

By Brendan Fitzgerald, CPA
2012-2013 Chair of the Executive Board

After nearly 30 years, the end of the Big-GAAP, Little-GAAP debate is near.

Then again, maybe not. I might even be committing a faux pas just by referring to it as Big-GAAP/Little GAAP instead of its current euphemistic description, “differential standards.” After this past May’s creation of the Private Company Council (PCC) by the Financial Accounting Foundation (FAF) to identify exceptions for private companies in the application of existing standards, there remains a great amount of work to complete before we can declare the debate over.

The issue has been controversial as far back as 1974, with the formation of the AICPA’s Committee on Generally Accepted Accounting Principles for Smaller and/or Closely Held Business. From purists who think generally accepted accounting principles represent one set of standardized rules used in financial reporting, to the private company stakeholders who think current standards do not adequately address the differences in reporting needs between the users of public and private company financial statements, creating generally accepted accounting principles with exceptions for private companies is daunting. Any final product must be predicated on an acceptable definition of a private, or non-public, company while addressing the needs of the users of private company financial statements. It must also provide a common sense solution for the problem it is attempting to solve.

From its inception in 2007, the Private Company Financial Reporting Committee advised FASB on private company issues. The subsequent formation of the Blue Ribbon Panel on Standard Setting for Private Companies in December 2009 was intended to provide recommendations to the FAF on the future of standard setting for private companies. The recommendations put forth in the Blue Ribbon Panel’s report issued in January 2010 included the creation of an independent standards setting board that would have direct reporting responsibility to the FAF. While that recommendation was rejected, one of the underlying arguments for the independent body was that the FASB had not exhibited much interest toward validating the issue. Given that FASB has final endorsement over recommendations advanced by the PCC, the argument will either be upheld or disproved by their decisions. As PCC recommendations are promulgated, it is imperative that there is a clear, accepted definition of the entities to which they apply. Simply using public versus private or total assets doesn’t address the complexity or uniqueness of an entity.

Is it also considered heresy to conclude that some aspect of the needs-are-different argument arises from practitioners who want relief from burdensome measurement and disclosure requirements? Many private company owners engage a CPA for financial reporting to comply with a credit agreement provision requiring them to provide financial statements prepared in accordance with GAAP. The owner is acquiescing to the provision out of necessity. Furthermore, private company owners are frequently asked to personally guarantee the debt of the entity, thus relegating the GAAP basis financial statements to being one part of the credit-decision process (albeit an important part). If a private company owner views financial reporting as merely a check mark toward satisfying a lender’s regulatory documentation requirement, their engagement in the process tends to increase only as their concern for satisfying their lender’s needs increases. While they trust us as professionals, they are not pleased when our adjustments or disclosures to bring the financial statements into compliance with GAAP lead to violating a loan covenant. Another use of GAAP basis financial statements in the marketplace is driven by transactions between owners and prospective buyers. These two examples are commonplace and can elevate our anxiety. That is not to suggest we create accounting standards to produce only happy results, but recognize that we must balance the wants and needs of the users with recommended exceptions or modifications.

We must also not lose sight of the objective to improve financial reporting for private companies. The acceptance of GAAP basis financial statements stems from their relevance, reliability, consistency and comparability. For some time now FASB has been broadening the use of fair value measurements and disclosures for statements to be GAAP compliant. In the examples illustrated in the preceding paragraph – a lender or prospective buyer – statements prepared using fair value sure seem to be a solution. Presenting assets and liabilities at fair value could be useful in either case. You can argue that such a presentation is more relevant, but it is likely to lack reliability. Once that argument begins, comparability and consistency – or lack thereof – is not far behind. Furthermore, a private company owner who, when presented with the requirement that the assets and liabilities be presented in the financial statements at fair value also receives an education on professional independence, questions why we have to make it so complicated, we’d like to have an answer.

If we cannot arrive at widespread acceptance and reasonable implementation, all we have accomplished is creating additional diversity in private company financial reporting. Additional complexity and higher cost is not a desired outcome. When the time comes for public comment of PCC recommendations, if the only respondents are CPAs, we might have no choice but to conclude that the debate will never be over.

As I see it: What I heard from members at the spring PIUs

by Clarke Price, President and CEO

The Society’s Professional Issues Updates (PIUs) are great programs. The 15 PIUs that we held this spring were attended by 2,928 members and the PIUs reached a total of 3,960 individual members in the fall 2011 and spring 2012 combined—that’s 29% of OSCPA’s resident CPA membership.

While the PIUs are an update on the major issues facing the CPA profession and business, sprinkled with a bit of my humor and sarcasm, they provide a unique opportunity to hear what’s keeping our members awake at night. The spring PIUs provided a unique snapshot of what members are thinking:

The political environment is a major concern/interest. In almost every session, the number one issue of interest was the political environment and outlook for the future. Regardless of whether it’s the Ohio General Assembly or Congress, PIU participants are concerned about the effective stalemate that exists in the political process. Issues aren’t moving and there seems to be a chasm that divides legislators and prevents them from talking across the spectrum of political philosophies. With the number of very significant issues that need attention, from extending the current tax cuts to the multitude of tax extenders that require action to the potential impact of sequestration, the inaction in Congress is of particular concern. And every bit as concerning is the lack of progress on critical issues in Ohio like municipal tax reform and ensuring Ohio’s fiscal stability and viability through changes such as reforms to our public pension systems.

OSCPA should continue to oppose proposals to tax accounting services. That’s one very clear message that came out of the PIUs. In the polling that was part of the Spring PIUs, 80% of respondents said OSCPA should continue its opposition to taxing accounting services, 15% responded that times have changed and OSCPA’s steadfast opposition wasn’t the correct position in today’s environment and 5% weren’t sure what the correct position should be. Ohio CPAs recognize the financial hardship the tax would put on our small businesses, and the competitive disadvantage professionals in our state would face. But to be clear, OSCPA’s position has long been that, should a strong case be made, we could support taxing services if the tax was applied to all professional services. However, if there is a single exemption for legal services, medical services or any other service, OSCPA will mobilize all resources to have accounting services excluded from the tax.

CPAs acknowledge the need to plan for the departure of the Boomers, but they aren’t doing anything about it. Time and time again, there was concurrence with the observation that CPA firms aren’t dealing with the reality that Boomer partners or owners are going to depart in record numbers, but there’s precious little planning going on to get ready. For sole practitioners there’s an even more significant issue:  the failure to take steps now to arrange for services to be provided to clients in the event of the practitioner’s death or temporary incapacity. There’s clear recognition of the importance of these issues, but there’s also little action to address them.

Managing through generational differences is a continuing source of interest. Any time I brought up the issue of managing across the generations, or defining generational differences, there was clear interest among the PIU participants. However, I observed a significant difference in comments and audience reactions this spring. Where the automatic reaction in the past was to complain about the differences among the Milennials, this year there was also significant interest in the differences that Boomers bring to the challenge of managing people. In particular, there was interest in the impact of Boomers working past their mid-60s and how that’s blocking advancement opportunities for the generations behind them. And there’s always interest in how to deal with the Boomers as they personify the “grumpy old man/woman” characterization. Having reached that stage myself, I know this is a tough challenge!

Private Company Standards is a major topic of interest. Whether it’s the FAF plan to create a Private Companies Council that will recommend deviations from GAAP for private companies or the AICPA plan to develop guidance under OCBOA, the overwhelming sentiment was that something needs to be done for private companies. While there’s support for change, there’s also angst that it’s taken so long to get to this point and concern about just what the change(s) will mean.

There’s suspicion about the direction of PCAOB and the potential for a cascade of changes to non-public companies. PCAOB’s consideration of changes to the auditor’s reporting model and proposals to mandate audit firm rotation are a source of concern. While PCAOB’s scope only affects public companies and their auditors, there’s clear concern among PIU participants that these changes will cascade down and become the norm. Some PIU participants have a clear distrust of PCAOB’s direction, and the majority have a concern about PCAOB’s motivations and believe “overreach” may be the word of the day. Read July CPA Voice roundtable discussion, What’s next for the audit profession? featuring the opinions of several Ohio CPA audit experts.

Members like the new format of CPA Voice. While changing the format from a standard page size to a tabloid format might not seem significant, going back to a traditional page size is a hit with members. That change hits close to home since the move to a tabloid was my idea, and it was a clear loser with members!

The Professional Issues Updates are one of the most enjoyable things I get to do as OSCPA’s CEO. The opportunity to interact with members and talk about what’s going on is fun and I enjoy putting the program together. My swan song with the PIUs will be this fall. To find the session that’s closest to you, go to the PIU page on OSCPA’s website and get registered. Remember, the PIUs provide 4 CPE credits at no charge and they’re offered EXCLUSIVELY for OSCPA members. The staff and I are already working to make the fall PIUs a hoot. cp