Thursday, June 30, 2005

IIA Position Paper on Outsourcing Internal Audits

The Institute of Internal Auditors recently published a position paper on outsourcing internal audits. Caution: the paper comes in the form of a download, so take appropriate protective measures for your computer.

Senate Energy Bill Filled with Tax Incentives

H.R. 6, the Energy Bill, passed the Senate 85-12. Among tax incentives included are those for increasing refinery capacity; clean coal tax credits for business; business and residential credits for alternative fuel sources such as solar power; credits for rental home owners for efficient air conditioners and refrigerators and credits to residential home owners for efficient dishwashers and refrigerators. Clearly, the Senators were trying to accomplish environmental as well as energy goals.

A number of questions arise here: [1] How many of these incentives will survive conference committee?, [2] How will these incentives fit with President Bush's tax reform (and presumably simplification) goals, [3] (in connection with [2]) will Bush sign off on the new incentives?

Wednesday, June 29, 2005

Updated links

Partly as a result of Ms. Lang's June Journal of Accountancy article; I have added some additional links. Hope you enjoy trying out some new links. Remember, the headline of most posts also will be a link to a given story. Also, the link list is based on alphabetical order of the URL.

Grassley: Expect Revenue Increases to Address Social Security

Senate Finance Chair Charles Grassley (R-IA) says that 10 of 11 GOP members of that committee have come to a general agreement about legislation on Social Security. He expected a combination of subtle revenue increases, adjustments in benefit calculations and adjustments in retirement ages.

There is some question whether President Bush will (or politically can) accept even subtle tax changes and Democrats may question the benefit calculation adjustments. Nevertheless, it looks like Senator Grassley has a good chance of at least getting a bill out of committee.

House to IRS: No more debt collection outsourcing

Two Congressman from separate parties: Chris Van Hollen (D-MD) and Rob Simmons (R-CO) have sponsored a bill which would defund any efforts by the IRS to place IRS debt collection with private agencies; citing threats to taxpayer rights and privacy. A similar effort last year made it through the House, but died in Conference Committee.

Scrushy Crushes Fraud Charges

Richard Scrushy, former CEO of Birmingham, AL healthcare giant HealthSouth, was found not guilty on criminal charges of fraud brought based on Sarbanes-Oxley legislation. Jurors complained that prosecution witnesses were not credible and found FBI tapes less convincing than expected. Scrushy's tribulations are not yet over; he still faces SEC civil trial and new HealthSouth head Bob May indicated that Scrushy would not be welcomed back anytime soon.

Update: Dan Ackman of Forbes (
asks whether market incentives might be more effective at unearthing fraud more quickly.

Tuesday, June 28, 2005

Nonprofit panel recommends greater accountability for nonprofits

The Financial Executives Institute has made available an extensive report by the Panel on the Nonprofit Sector urging greater transparency and accountability by nonprofits while applauding their contributions to American society. The Principles to Guide Improvement of Accountability (pp. 22-24) were particularly impressive. The recommendations were numerous; FEI provides a summary.

This is a particularly important part of American society. In many cases, the nonprofit sector is both more efficient and more compassionate (or at least more visibly involved) than the government sector in dealing with human needs and societal problems. Alas, in our imperfect world, nonprofits cannot stretch resources far enough to meet all needs; thus (reluctantly) I must acknowledge some need for government involvement in social needs. The Panel is correct that abuses of tax law and donor monies also taints by a minority of nonprofits (if to some degree unfairly) many other nonprofits, thus it IS important that those in charge of nonprofits take their fiduciary responsibilities to heart.

Enrolled Agent Exam Q & A

The National Association of Tax Practitioners has the Questions and "Unoffical" Answers from the 2004 Enrolled Agent Exam. This should be helpful for anyone planning to becoming an EA and may make good self-study material for CPA firms trying to get new staff ready for the 2006 tax season.

Monday, June 27, 2005

Lemonade from a Lemon: How to Take Advantage of Interest-Only Loans

In a recent post I was quite critical of interest-only loans (such as the one Quicken is promoting in radio ads). For a small number of people who are VERY disciplined in their spending; it is possible to use this type of loan to advantage if they are offering a large enough rate incentive.


[1] Budget for the following: interest, principal (remember, these folks would just as soon you forget this), taxes, homeowners' insurance, and (if less than 20% down) PMI.

[2] Plan on paying 1/120 of the original house purchase price EACH month until 20% is reached. Then, remember to contact the lender to have PMI removed.

[3] Plan on repaying the entire loan in 15 years (perhaps 18 if you have a very steady job (such as working for the U.S. Government)).


[1] Apportion no more than 40% of income at ANY month to repayment. For most months, the maximum should be 35%.

[2] Do not use an interest-only loan unless you can reduce the interest rate by 1.5%. Also, do not use if prepayment penalties or other significant restrictions on prepayment of principal apply.

[3] Do not use an interest-only loan if you have dependents or if you are at all inclined toward impulse buying.

[4] Do not use an interest-only loan if the economy where you live is stagnant or declining.


Joe and Martha Williams earn $60,000 per year and take home (after taxes and other withholdings) $3,800 per month. They put 10% down on a $120,000 home (assume all closing costs paid by seller) for a mortgage of $108,000. The interest only loan has a 3% annual interest rate. PMI is $60 a month until the mortgage balance reaches $96,000 [(100%-20%)($120,000)]. Combined taxes and homeowners insurance: $2,400 per year (assume an escrow account is available for no extra charge).

Recommended strategy:
For the first year: Average loan balance $102,000 [($108,000+$96,000)/2]. Maximum balance $108,000. Interest rate per MONTH 0.25% (3%/12). Interest first month $270 ($108,000 *0.25). Average interest $255 ($102,000*0.25%). Monthly principal repayment: $1,000 ($120,000/120).
First month payment: $1,530 ($1,000 principal + $270 interest + $200 taxes/insurance + $60 PMI). This is 40% of monthly take-home, right at maximum. Additionally, most people making $60,000 probably are going to want a home costing at least $120,000 in the present real estate environment. For the year as a whole the monthly payment will average $1,515 (1000+255 interest+200+60) which is still close to 40%. Each potential buyer will have to envaluate whether they can reduce spending enough in other areas to cover the extra housing spending the first year.
For the second year, PMI can be cancelled and the repayment of principal could slow to 1/150 of house cost and still meet the 15 years recommendation. Interest in thirteenth month (first month of second year) is $240 ($96,000 * 0.25)--it will slowly decline (about $2.50 per month) thereafter. Principal repayment is now $800 per month ($120,000/150). Now the repayment in month 13 is $1,240 ($800 principal + $240 interest + $200 taxes and insurance) which is a more comfortable 32-33% of monthly take-home. If taxes and insurance do not change (far from a sure thing--then again, wages will be probably increase), the payment will slowly decrease to about $1,000 per month when the loan is paid off halfway through year 14.

The big questions then come back to: [1] Can you discipline yourself to pay back principal when it is not required?, [2] Can you be happy (or at least content) in a house that fits your take-home pay?

Carnival of the Capitalists

A weekly feature of Tick Marks.

Tippy Canoeing

A friend from Junior High (Klondike, Tippecanoe County, IN), Howard White, invited me for a canoe trip on the Red River Saturday. My wife was studying for the Tennessee Bar Exam so I went. On the overall, we (especially Howard) had a good run, but we did get too close to the bank a couple of times in stretches of light rapids. The first time I tried to duck a branch and tipped us in ; thankfully the water was shallow and we were able to walk back to the bank. The second time I was able to stay, albeit it with a very minor and quickly passing shoulder strain (I'm not a youngun anymore). The river was not picture-postcard beautiful, but quite pleasant and Howard and I got to engage in some nostalgia.

No significant injuries (a knee scrape and a hip bruise), pleasant scenery and about the only way you could spend time outdoors in Northern Tennessee this past weekend without frying. God is good!

Saturday, June 25, 2005

Best of blogs--June 18-24

FinanceProfessor cites a study indicating that the market may be more effective at punishing white collar crime than regulators are (June 22).

Footnoted applauded Pfizer's decision to ask directors who received a majority of "votes withheld" to submit resignations (24).

PFBlog announces the second Carnival of Personal Finance (24).

Roth CPA Updates tweaks the State of Illinois for its website listing beneficiaries of corporate tax breaks and shelters (20).

Tax Guru does a nice job explaining how a married couple can gift real property to a daughter and son-in-law (21) .

Tax Mama worries that the KPMG fiasco hurts the chances of future tax cuts. (18)

Tax Prof points out that true tax fanatics can now wear Treasury Circular 230 t-shirts and tops (Aaugh--an Art Spigel uniform (GSN Extreme Dodgeball) would be an improvement over T230 wear).

Friday, June 24, 2005


International accounting firm KPMG has admitted wrongdoing in questionable tax shelter development starting in the late 1990s ( and is trying to limit its losses by working out a deal with the law firm of Milberg, Weiss, Bershad and Schulman. In response, a plantiff attorney's firm of Bernstein, Litowitz, Berger and Grossmann is seeking to enjoin (stop) a settlement until a trial can be scheduled. Yet to be determined are the penalties from the SEC (the PCAOB was not in place when the material was issued--thus presumably not able to act) for violations. The IRS have already found the shelters abusive and a report by Senate staffers indicated a $1.4 billion loss in revenues from the shelters.

To be fair, I should note that academics probably do not face the ethical pressures (certainly not this type of ethical pressure) that private accounting firms face and that I do not have a perfect ethical record myself. That said: [1] What was KPMG THINKING?, [2] Hopefully, accounting firms have earned from Enron, WorldCom, etc. and with the heavy hand of the IRS, PCAOB and SEC hanging over them we will not see large CPA firms repeat this behavior in the future. On the overall, I still believe that a sizable majority of CPAs are people of integrity (more on this in a future post) but this sort of behavior must be vigorously discouraged.

Land Grab Sanctioned

The Supreme Court approved eminent domain for private development purposes, deferring to state and local courts, in a way that seems (to me, anyway) to take the "interstate commerce" clause into hyperdrive. A number of conservative political blogs (see for a sample) and some moderate and liberal blogs as well (because of the pro-business tilt) are queasy about the result. It seems to me that most of the Supreme Court either forgot that the American Revolution was about private property (partially encapsulated in the "pursuit of happiness") or believe that 21th Century America is "too sophisicated" to need the limits of the original document.

Thursday, June 23, 2005

Procedural update

As an attempt to improve the "look" of the blog, I am now putting links with the title. When the post has only one link (most posts), the link can be made by pressing the title of the post. In those situations where there are more than one link in a post: [1] if plural links from one source--the URL for the website will be given, but not necessarily the link to the article; [2] if one link URL is significant longer than another or any others, it will be included in the title where the other[s] will be in the body of the story, (3) long URLs not in the title may be shortened to the website or at least sectional URL, [4] in any remaining scenario, the "most important" or "most salient" URL will be included in the title. Examples of this new format can be found in the "Local Tax Seminar" and "Full Funding for IRS..." posts below.

Local Tax Seminar

Austin Peay, where I teach, is having a tax seminar July 13. I may be teaching intermediate accounting that day; if not, there is a good chance that I will attend.

Wednesday, June 22, 2005

Full Funding for IRS Enforcement Rejected in Committee

By a 34-27 vote, the House Appropriations Committee rejected an amendment to add $180 million to the IRS enforcement budget by Rep. John Olver (D-MA). Olver said that the increase would be consistent with President Bush's budget and that enforcement could help reduce the "tax gap"--presently estimated at about $1/3 trillion. Specifically, Rep. Olver estimated $2 billion of increased revenue with the unsuccessful legislation.

Why Cheating Happens

Amey Stone ( attended a luncheon by David Callahan ( who addressed what he called an epidemic of cheating in the country. Mr. Callahan referred to the "audit triangle" now commonly used in auditing texts--opportunity, rationalization/excuse, stimulus (often a threat to the potential cheater's well-being). Among the reasons given for the increase in cheating were increased workplace pressure and a sense that one could not succeed without cheating. The net result--the "everybody's doing it" phrase that many use as a pre-teen to defer bedtime or which some use or hear as a teen when dating.

Final question: Could the reduced participation in religious activities nationwide compared to 40-50 years ago and corresponding lessened fear of after-life consequences have any impact here?

Tuesday, June 21, 2005

The High Cost of Ignoring the Entity Principle

Adelphia officers John and Timothy Rigas received extended prison terms (John 15, Tim 20) for dipping into Adelphia coffers for personal reasons ( A reminder to us all that ethical failures can have massive consequences.

Monday, June 20, 2005

Carnival of the Capitalists

The weekly Carnival of the Capitalists canbe found at Blog Business World (

Saturday, June 18, 2005

SOX: The Scholarly Second-Guessing Begins

Roberta Romano has just published an article in the Yale Law Review (an abstract or summary of the article is found at which calls Sarbanes-Oxley "quack corporate governance" with "mismatched means and ends" which ignored accounting and finance literature which provided metrics which could measure the effectiveness of the legislation. Romano calls for corporate governance provisions to be made optional rather than mandatory and for future legislation to essentially provide a "cooling off" period where the initial law could be deliberated more carefully after the crisis had passed.

Best of the Blogs--June 11-17

In what may become a Saturday tradition, and even at some point a Carnival of the Bean Counters, a look at what the bloggers on the link list at right wrote about this past week.

The Chicago Boyz criticized a group of eight former US ambassadors for a petition that Congress not withhold part of UN dues in view of some of the recent scandals (oil-for-food, Congo refugees, etc.) made an uneasy case for hedge fund regulation.

Footnoted cited Todd Martin, the new head of Hewlett-Packard's personal computing unit and his strange severance package with prior employer Palm One.

Roth CPA Updates had lots of good blogs this week. One was a story about a Charles Brown who found that poor substantion of transportation and home office expenses leads to deduction disallowances which were not Peanuts (pun intended and puns also are part of the Roth write-up).

Tax Guru compared LLC, S Corporation and C Corporation benefits and problems for a North Carolinan who is about to start a landscaping business. Kerry also is a vocal opponent of the estate tax.

Tax Mama applauds the start of hearings by the House Ways and Means Committee on major tax reform and hopes that this leads to tax simplification.

For Father's Day weekend, Tax Prof profiles a father and son who are each tax professors.

Ominously, neither Financial Accounting Blog nor Real Life Accounting have published in June yet. Hopefully, each blogger is just taking a summer siesta.

Friday, June 17, 2005

Tax Shelters and Underpaid Taxes by Government Contractors

Tax Analysts ( has two stories of interest today. Tax Division Assistant Attorney General Eileen O'Connor asserted at an AICPA meeting in San Francisco that the U.S. Government has done "very well" in obtaining information about abusive tax shelters, in spite of occasional court setbacks. Additionally, a GAO report to the Senate indicated that federal contractors had underpaid various federal taxes to the tune of $3.3 billion. Key Senators Norm Coleman (R-MN) and Carl Levin (D-MI) wanted to put additional pressure on delinquent contractors, but were told by IRS Commissioner Mark Everson that some GAO-proposed procedures would violate taxpayer rights.

Thursday, June 16, 2005

Pension Benefit Guaranty Corporation Underfunding Exposure

Director Douglas Holtz-Eaton of the Congressional Budget Office (CBO) testified before Congress yesterday
( The director indicated that the present deficit was $23.5 billion and that economic costs to taxpayers would be about $68 to $91 billion over the next twenty years. He also said that present techniques emphasized cash flows rather than future economic costs, which tended to obscure the potential problem. He recommended some increase in employer premiums and added that Bush administration proposals were reasonable. At the same time, he warned that overly drastic changes could jeopardize employer willingness to continue the plans.

My opinion? Defined-benefit employer-sponsored plans are on the way out. Few if any new defined-benefit plans will be offered and many employers will attempt (hopefully through legal and ethical means) to convert defined-benefit plans to defined-contribution plans or eliminate pension coverage altogether.

Federal Tax collections up--but for how long?

"The Incredibly Brief Tax Windfall" by Howard Gleckman of Business Week ( reports that tax collections are up by almost $200 billion over 2004. Sadly, expectations are that increased federal spending (highways, energy, Medicaid/Medicare) will swamp the good collection news and leave the debt level uncomfortably high.

Wednesday, June 15, 2005

Treasury on IRS Tax Administration--Good but not perfect

The Treasury Inspector General of Tax Administration (link: found that the IRS did a good job of administring the tax law during the most recent season. Nevertheless, there were some computer glitches, incomplete adjustments for recent tax changes and cost overages found in the 60 page report.

Tuesday, June 14, 2005

GAO studies

Two recently published GAO studies look at the shortcomings of defined-benefit plan legal safeguards ( and factors behind increased gas prices( The first study addresses some of the issues raised in the Real Clear Politics blog entry cited yesterday; the second indicates that increased crude oil prices, reduced refinery capacity and decreased competition because of mergers. Additionally, two other issues were addressed--taxes are about 23% percent of gasoline prices (versus 48% for crude oil and 29% for refining, distribution and marketing) but have not significantly increased recently and reformulated gasoline for air pollution control has an impact on gasoline prices but a relatively minor impact (probably less than $0.10 per gallon).

Homeland Security needs financial officer

A few days late on this, but ( reports that Representative Todd Platts (R-Pa) has criticized the Department of Homeland Security has failed to submit a nominee for chief financial officer to the Senate for confirmation within six months and for failing to complete an annual audit of internal controls.

Monday, June 13, 2005

United Airlines Pension Plan Shot Down

Real Clear Politics ( has an excellent commentary on a drastic cut in United Airlines pension benefits; including a point on the impact of this action to private accounts for Social Security.

So much for "no news is good news"

Google News headline: "Stocks Edge Lower on Dearth of News."

Step right this way...

The Carnival of the Capitalists ( is hosted this week by fellow Blogspot site Marketview. I'm not sure which is more impressive: that a teenager put this together or that Byrne appears to have survived years of the dreadful St. Louis Post Dispatch with sanity intact.

Saturday, June 11, 2005

Coin Collection Scandal in Ohio May Damage GOP

ABC ( has reported that state investments in rare coins by GOP fundraiser Tom Noe have been unsatisfactory and the fallout may endanger well-known Republicans in the state that likely carried George Bush to victory last year.

Review of links--June 3-10

Some of the items found on the blogs linked at right during the past week:

Chicago Boyz looked at the European Union compared to other alternatives and decided, from a libertarian perspective, that the EU was a third-best option.

FinanceProfessorBlog looked at research done (by Steven Levitt of "Freakonomics" fame) on tamarians pulling slots to get rewards and found that investing truly could be "monkey business"--and he didn't even mention Michael Naismith's success as a entertainment capitalist in LA.

As a result of a proxy fight, Footnoted discovered that Topps Baseball Cards was a grand slam for CEO Arthur Shorin with bonuses of about $500K per year.

PFBlog mourns the increasing scarcity of great credit card rebate programs.

Roth CPA applauds a Judge Barbara Crabb for including hyperlinks in an opinion denying relief to a tax protestor.

Kerry Kerstetter (Tax Guru) evaluates Section 179 incentives for buying an SUV for business use.

TaxProf cites Michael Barrett of Notre Dame for making a theological case for progressive taxation of dioceses.

Friday, June 10, 2005

Interest-only mortgages--setting up a recession?

A Business Week article (link: entitled "The Home Loans Vexing Greenspan" by Peter Coy notes that Allen Greenspan is uncomfortable with the growth of interest-only mortgage loans. These appear to be most popular in California, although even Atlanta in the Southeast and Columbus in the Midwest see fairly heavy use of these mortgages. I don't think that you have to be a Alan Greenspan or a Dave Ramsey (Nashville-based debt opponent--see ) to see that interest-only mortgages need to be approached only with the greatest of care. For history buffs, consider that use of margin buying of securities in the 1920s was considered one of the major causes of the 1929 stock market crash and subsequent Great Depression.

Wednesday, June 08, 2005

FASB's proposed Hierarchy of GAAP

You still have until June 27 to comment on FASB's GAAP hierarchy (link: ).

Proposed changes in educational requirements to sit for CPA exam

The National Association of State Boards of Accountancy has proposed expansion of required hours, both in accounting and in business, to sit for the CPA exam. Additionally, the hours required in accounting have become more specific, with special added emphasis on communication, ethics and research. A good link is available through the AAA homepage (see links list at right).

New Pay Scale for Civilian Federal Employees

The Bush administration, as announced by acting director Dan Blair, has proposed sweeping changes in the way pay is determined for civilian federal employees (link: ). Basically, the GS pay system which has been the predominant means of setting pay for about the last 60 years would be changed based on experimental approaches used in Defense and Homeland Security. Federal unions and Congress appear to initially be skeptical.

Monday, June 06, 2005

Carnival of the Capitalists

Under the theory that if it is good enough for Glenn Reynolds and Instapundit, it should be good enough for me; here is a link to this week's Carnival of the Capitalists-- .

Friday, June 03, 2005

SEC Chair Appointee

President Bush has nominated Rep. Chris Cox (R-CA) to head the Securities and Exchange Commission to replace resigning William Donaldson (link: My prediction: the Senate will give him quite a few tough questions (the Senate is not much enamored with the Republican House and many Democrats believe that President Bush is too chummy with big business) but, barring unexpected problems with his testimony, he will be confirmed (after the judical deal and the postponement on Bolton's nomination, the Democrats would be leaving moderate Republicans like John McCain "hung out to dry" if they fight overly vigorously).

Thursday, June 02, 2005

Review of links--May 30--June 2

A quick review of some of the Tick Marks linked sites includes the following stories from this week:

Financial Accounting Blog--PCAOB Issues first sanctions against a CPA firm.

Finance Professor Blog--An evaluation of the recent Supreme Court decision absolving Arthur Andersen and Company from criminal liability in the Enron case.

Footnoted--Goody's chairman gets nearly $500K in private jet goodies.

PF Blog--Free annual credit report information may be obtained by Southerners starting June 1.

Roth CPA Updates--Tax Analysts writer rightly fisks (criticises) a national retail sales tax

Tax Guru (worth visiting for the comics alone)--Online Journal of Accountancy has a good article on new accounting blogs [self-serving note: Tick Marks is too new for inclusion].

Tax Prof--More states are levying taxes on cosmetic surgery (the Botax?)

Supply-sider solution to tax code

Veteran supply-sider Steve Forbes weighs in at (surprise, surprise) Forbes with a call for a simplified tax code and reduction in tax rates (link: <>)

Wednesday, June 01, 2005

June calendar

At the start of each month, I hope to have a calendar for the month's major conferences, etc. I hope to upgrade this a little bit each month. For June:

6-8: AICPA Practitioners Symposium--Orlando
8,9: PCAOB Standard Advisory Group Meeting on PCOAB Auditing Standard #2 (Internal Control Audits in Conjuction with Financial Statement Audits)--Washington, DC
12-15: 17th Annual Conference of National Association of Local Government Auditors--Milwaukee
13-17, 20-24: AICPA National Tax Education Program--Champaign-Urbana, IL
14-18: National Conference for National Association of Black Accountants (NABA)--Detroit
16: Quarterly Estimated Payments due for IRS
16, 17: SEC Advisory Committee on Smaller Public Companies--New York City
18-22: IMA 86th Annual Conference--Boston
25-27:75th Annual Convention, Tennessee Society of Certified Public Accountants (my home state)--Johnson City
28, 30: IRS Nationwide Tax Forum--San Francisco

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