Institute of Internal Auditors Issues Information Technology Guidance for Internal Control Audits

The IIA recently published guidance for management, internal and external auditors, regulators and others a method for determining which general controls related to information technology (IT) should be tested to insure suitable internal control (IC) for annual financial reporting purposes. GAIT (Guide for Assessment of Information Technology general controls) has four core principles: [1] identification of IT risks and controls should be determined with similar techniques used to determine key internal control risks for other facets of the organization, [2] auditors need to identify as IT process risks the processes which affect critical functionality in financially significant applications, [3] risk level needs to be assessed at various level of IT, such as program code, database, systems and network and [4] IT control risks are best mitigated through achievement of IT control objectives as opposed to individual control activities. A streaming video of the presentation is available at no charge until early May at http://www.visualwebcaster.com/event.asp?id=37575.

Bloggers such as Big 4 Guy and Tech Gap probably are better prepared than I to fully explain the ramifications of this announcement. At minimum, however, this statement appears to provide useful guidance for audits of information technology systems as part of an internal control evaluation.

Some Nutmeg Wisdom to Spice Up Your Portfolio

Earlier this year, the Connecticut Society of CPAs put forth a common-sense approach to getting financial affairs in order. The seven parts of their pronouncement, in alphabetical order: direct deposit part of your paycheck into some form of savings [2], evaluate (and if necessary, reshuffle) your portfolio [5], get rid of holiday debt (start with highest interest rate) [1], investigate your insurance to see if you have what you really need [3], make contributions to retirement vehicles such as 401[k]s, IRAs or Roth IRAs [4], organize financial planning and make tax planning a year-round consideration [7] and write (or update) a will [6].

Good ideas; many have wide application. Hope you are using at least some of these.

The IRS "Dirty Dozen" for 2007

The Internal Revenue Service has announced its least favorite over-aggressive (i.e. fraudulent) tax positions during the early stages of the 2006 tax season. Gaining a special place of dishonor are attempts to claim excessive amounts of telephone tax credits. Additional "creative" [?] strategies include: shifting undervalued property to Roth IRAs, shell corporations used to underreport income (with ignoring of controlled group law probably occurring as well), American Indian Employment credit (technically available to qualifying employers, it has been used by some employees a la the notorious "slavery credit" of several years ago), structured entity credits (basically considered an abusive tax shelter, the entity exists solely to claim state conservation and/or federal rehabilitation credits). Among the "oldies but baddies" were zero wage W-2s, trust abuse, fraudulent charitable deductions, return preparer fraud and phishing. Included in the not dirty dozen but still dishonorable mention category were: suspect credit counselors, employment tax evasion and "no gain" deduction.

I understand the lack of enthusiasm for paying taxes--certainly I would like more accountability by the Federal Government for its spending growth over the last 80 years or so. At the same time, defrauding the government is neither moral nor shrewd.

FASAB Looks at Fiscal Sustainability

The Federal Accounting Standards Board Advisory Board (FASAB) has established a fiscal sustainability board to determine to report on whether current/future budgeted levels of spending on federal policy and programs. The ten members represent five agencies of the US Government and five members of "think tanks" such as the American Enterprise and Brookings Institutions. The stewardship function was emphasized and FASAB Chairman Tom Allen indicated that the reports might go beyond material covered in federal government financial statements.

It is always good to see Federal managers look at issues of interperiod equity; it seems that too often spending is maintained (or more frequently increased) just because that was how money was spent in the past. One big question (and note the presence of a Social Security Administration Actuary and Economic Adviser on the board)--can Social Security be maintained in present form--a question that Congress shirked two years ago.

IRS more than doubles Advisory Council

Sixteen new members were added to the eleven returning members of the IRS advisory council. These members include seven academics and researchers: Marsha Blumenthal, Charles Christian, Lillian Mills, George Plesko, John Karl Scholz, Eric Toder and George Yin. Nine tax practitioners were included: Herbert Beller, Michael Boyle, Francis Degen, Andrew Lyon, Daniel Moore, Robert Nath, Donna Rodriguez, John Satagaj and Philip Tatarowicz.

Congratulations to each new member nominated. I hope each of you will put the well-being of taxpayers first; moreover, assuming that this is the group which reports to Nina Olsen, I hope that you will be kind to fellow member Kay Bell (Don't Mess with Taxes) so that she can continue her good work on her blog and the Carnival of Taxes.

Needing a Mulligan Myself

Just finished correcting my telephone tax post last week--thanks to Stacia who pointed out some errors in her comment. Also put up two new links--one to the Tax Blogger community mentioned in several posts last month and one to American Legends. Generally, I do not link to predominantly sports websites (though I am quite the sports fan, I want to focus on accounting-related websites for the blog) but this blog has an extensive blogroll including a sizable number of news sites and political blogs; therefore, it is shown in the news, etc. section of the blogroll as a news/sports portal.

Can I Have a Mulligan on Our Financials?

Audit Analytics found that 1,876 businesses restated their financials last year. The growth came from small-capitalization firms, larger firms actually slightly reduced restatements in 2006. With the number of restatements more than four times the 2001 number of 452, it appears that compliance with Sarbanes-Oxley drives a large number of the restatements. Smaller companies seem to have their greatest problems with debt vs. equity on financing instruments, while larger companies continue to struggle with executive compensation.

In my mind, restatements are less a signal of present reporting problems than of prior reporting problems. Nevertheless, the number of restatements could be argued to be a backhanded proof of the efficacy of Sarbanes-Oxley, especially its internal control provisions. The restatement count for larger firms also may add fuel to the drive to reform executive compensation, which I discussed Monday.

Chair of House Financial Services Committee: Frankly, It is Time to Reign in Exec Comp

Representative Barney Frank (D-MA) has called for stricter rules on executive compensation and has criticized the Securities and Executive Commission for supporting FASB language which Frank believes will reduce reporting requirements on stock options. Although the SEC justified their position on the basis of consistency and understandably, Frank was not sold, citing the recent $200 million + severance package to Home Depot's Robert Nardelli. Under consideration is legislation that would: require auditors to verify executive compensation packages, require greater and more understandable disclosure of executive compensation packages, additional disclosure on how bonuses can be achieved, separate shareholder approval of termination packages for top executives and website disclosure of executive compensation.

It does not take Sam Antar (White Collar Fraud), JackCiesielski (AAO), Michelle Leder (Found in the Footnotes) or David Phillips (10Q Detective) to recognize that better disclosure of executive compensation is consistent with generally accepted auditing standards. Do not underestimate this issue; next to present discomfort with the events in the Middle East, a perception of excessive pay for top corporate executives is one of the strongest issues in the Democratic Party's arsenal.

A Baker's Dozen of Tax Deduction Wallflowers

Kevin McCormally of Money cites a highly-placed IRS source in his list of 13 commonly overlooked deductions. First on the list was the last-minute renewal of a choice of sales tax or income tax which is beneficial to states like Tennessee with a narrow income tax and high sales taxes. Second is another December rescue--deduction for K-12 teachers purchasing supplies for their classes. Third is educational expenses, with special emphasis on the Hope and Lifetime Learning Credits. Fourth, a new feature, nondependent children can claim a deduction of up to $2,500 for student loan interest paid by parents. Fifth, noncash contributions to charities, including 14 cents per mile driven (32 cents if related to Katrina). Sixth, moving expenses to a new job--even though costs of getting the job generally are nondeductible. As a bonus, the deduction can be claimed even by nonitemizers. Seventh, military reserve travel expenses if over 100 miles and involves an overnight stay. Eighth, even working parents who have child-care reimbursement plans at work may be able to get a $200-$350 credit on the difference between maximum dollars eligible for credit and maximum dollars on a child-care reimbursement plan. Ninth, estate taxes paid on an inherited IRA (or similar financial vehicle). Tenth, any balance due paid on state or local income taxes (beware here, if you got a state income tax refund and itemized, you probably have includable income). Eleventh, refinancing points (and now the telephone tax credit as well)--small but generally worth the effort. Twelfth, increased basis on stock sold if the stock included a reinvested dividends option (the reinvested dividends in the past were includable income, thus added to the basis). Finally, a new line has been added to help jurors who were required to turn over jury duty pay to their employer.

Many useful hints, a few of which (such as estate taxes on inherited IRA or the jury duty pay tax status) I was not familiar with.

The Telephone Tax Refund: Take It, but Tread Lightly (unless you have the receipts)

To ensure that tax preparers do not abuse the telephone tax credit, IRS Revenue Agents and [Criminal] Special Agents have taken the unusual step of visiting 22 tax preparers. The IRS has a table of standard credits ($30-60) which it believes will apply to most taxpayers for the March 2003--July 2006 period in question. You can claim more, but you best be prepared to document the additional amounts. Very large claims (some have claimed in excess of $10,000) probably will have any refund frozen and increase the likelihood on an audit. While all this is going on, the IRS is also announcing the credit after one-third of early filers overlooked the credit.

Obviously, a lot of confusion going on here. If you do your return by hand or by tax software, double-check to make sure that you took the credit (the tax relates to long-distance service). One final question--wonder how the IRS agents sent to the tax preparers were received?

US News Shows Love to Personal Finance Bloggers

(Post #600) Emily Brandon of US News talks about the development of personal finance blogs as way to learn better money management, as an opportunity to receive perks and ad dollars in some cases. Ms. Brandon points out that while daily blogging is best, regular blogging as long as it is weekly or at least every ten days still will keep much of your readership. Passion is important to make the blog believable and fresh, says Jeff Hanson of the Your Way Ahead blog. At the same time, many bloggers fear putting personal information, even including their name, in part because of concerns about work consequences. Ms. Brandon finishes by listing ten of her favorite sites, including the Money Blog Network.

Congratulations to the Money Blog Network and members All Financial Matters, Consumerism Commentary and Free Money Finance, along with the other blogs named.

Carnival Triple Play, New Accounting Links and Other Notes

[1] For the first (and probably last) time ever, I am in three carnivals today: the "Tax Fraudster" article is in the Carnival of Fraud Carnival of Fraud; the "FDIC" article is in the Carnival of Personal Finance http://www.thesimpledollar.com/2007/02/05/carnival-of-personal-finance-86/">Carnival of Personal Finance and the "Gypsies" article is in the Carnival of Taxes (link above)

[2] I have a new set of accounting blog links, many of much deal with accounting fraud and corporate governance.

[3] Before Robert Flach put Wandering Tax Pro on a 2.5 month tax season hiatus, he did his own remaking of the Twelve Days of Christmas about the joys of client help (my wife and I refer to this type of aid as "puppy assistance").

[4] It appears that Michelle Leder may be taking at least of the Found in the Footnotes material to a pay site. While sad, I can understand that bills have to be paid somehow.

Gypsies, Tramps and [Tax] Thieves? A Federal Judge in Oregon Says No.

NOTE: I have been having some trouble with the new Blogger in posting articles from Accounting Web.

An IRS seizure of over $2 million from gypsy leader and used car businessman Bobbie Ephrem has been overturned with a federal judge saying that there was insufficient proof that the monies represented income to Ephrem or even belonged to him. Attorney Mark Blackman argued that Ephrem belonged to a communal sect of gypsies known as Roma and that much of the money was being held in safekeeping for Ephrem's sister-in-law (gypsies rarely use banks). Part of the problem may have been a dubious IRS informant; a man wanted on murder, assault and narcotics charges.

Looks like this may have been a case where the IRS acted first and asked questions later. Hopefully, some out-of-court settlement can be reached; it wasn't clear that Bobbie was completely on the up-and-up.

Cavuto Interviews George W. Bush

Fox News Business Host Neil Cavuto interviewed President Bush today on a variety of topics. The President's response to questions about CEO salaries and corporate governance was interesting--he emphasized that government's role in regulating CEO salaries should be very limited and that the major role of government in managing businesses was to assure accurate and transparent financial reporting by businesses. The interview is available at the Fox News link listed in this post's title--go to the "Your World" exclusive on President Bush and watch Part I.

Virtually no one would argue the value of accurate and transparent financial reporting--the other part is more controversial. Though my instincts on government regulations are similar to the President's, I will acknowledge that many believe that better financial reporting, though worthy, may not be enough to give small stockholders the ability to stand up to powerful management committees if management is acting to maximize personal interests while putting the company's long-term prospects at risk.

FDIC: You Can Keep More of Your Refund, Even if You Aren't Rich

FDIC Chairperson Sheila Bair recently urged low and middle-income taxpayers to use US Government and bank programs to save a larger proportion of their refund. Among the ideas cited by Ms. Bair were use of direct deposit (less temptation to spend if the money is already in the bank), use of free tax preparation such as VITA for taxpayers who qualify and to take any tax credit which the taxpayer legally qualifies for, even if the taxpayer has to file a more complex variation of the Form 1040 series. The FDIC also encouraged banks to be available to establish new accounts for taxpayers wishing to use direct deposit and extended a carrot in the form of favorable consideration under Community Reinvestment rules to banks showing a willingness to be supportive of low and middle-income taxpayers wishing to establish new accounts.

Many readers will not qualify for some of the ideas mentioned by Ms. Bair. Nevertheless, Ms. Bair is to be commended for encouraging greater savings by low and middle-income Americans.

IRS to Tax Fraudsters: Go Ahead, Make Our Day

NOTE: I promise that this post will be less long-winded than its predecessor.

As January ended and tax season started to take shape, the IRS announced an 89% success (incarceration) rate on fraud prosecutions for the 2005 season, a 3% increase over the previous season. Fraud indictments went up from 119 to 135, even though investigations went down from 248 to 197. Common forms of tax fraud cited included excessive deductible expenses or unallowable credit. Warning signs of a questionable preparer include: advertising emphasis on biggest refund, contingent fee for tax return preparation, brief time in tax preparation business (obviously not in all cases) and asking clients to sign a return before completed.

Congratulations to the IRS on its increased efficiency in getting indictments and convictions per investigation. One would think that the warning signs mentioned would common sense, but some taxpayers may not know that accountants, unlike personal injury lawyers, rarely work for contingent fees and that a big refund, even if there are no obvious math errors, is not ALWAYS the correct refund.