GSA: Many Federal Buildings are not in Satisfactory Condition

Stan Kaczmarczyk of the General Services Administration announced that over 150,000 federal buildings, or about 30%, do not receive passing scores on the facilities condition index. This result is consistent with Stan's assertion that federal real property management is at risk for waste, fraud and abuse. Additionally, the amount of federal real property grew slightly last year, although Stan was not sure whether this was the result of additional building or better inventory taking.

The quality of repair of federal building is of concern--in the future, with federal spending already at massive levels, it is likely that additional spending will be required to update or replace these buildings. Additionally, the raw numbers of federal real property are nothing less than staggering: over 1.25 million holdings (buildings or unimproved land), floor space of 3.8 BILLION square feet, federal lands of over 55 million acres (almost 90,000 square miles which is larger than ANY state east of the Mississippi and slightly smaller than Oregon) and estimated value of over $1.5 TRILLION.

FEI Claims that FASB Board Wants LT Preferred Stock to be Classified as a LIABILITY!

In a potentially stunning development, Financial Executives International claims that the governing board of FASB has voted that perpetual preferred stock should be classified as a liability rather than equity. FASB hopes to have its Preliminary Views document on liabilities and equity ready by the end of September.

It should be noted that I have not found this report confirmed at either the FASB website or any of about 3-4 other news sites which I have investigated since reading the FEI statement. If FEI is on target here, this would be one of the biggest adjustments to the balance sheet in decades.

SEC Chief Cox Goes Before the House Financial Services Committee

Securities and Exchange Commission Chair Christopher Cox and the remaining SEC Commissioners met the House Financial Services committee yesterday. Cox asserted that the commission has not gone soft on big business, that about a dozen investigations of collaterialized debt obligations, a favorite investment of "hedge funds" have started and that the SEC has imposed almost as much in fines in the first half of 2007 as in any previous complete year. Cox emphasized the role of the SEC in protecting investors but acknowledged to Republican lawmakers that costs of class-action lawsuits had been costly. Democrats, including Chairman Barney Frank, pressed action on a proposal to increase opportunities to place a greater number of issues as votes for all investors and to scruntize a pilot program requiring SEC attorneys to get approval from commissioners before negotiating fines and other penalties.

On the overall, I believe that Cox is doing a good job and trying to pay attention to the needs of investors. In these days of discontent with the Bush administration; however, Cox should not be surprised by extra scrutiny.

Audit Committees Searching e-Bay? IT Catching up to SOX as Source of Worry

A KPMG survey indicates that information technology is quickly reaching the level of Sarbanes-Oxley Section 404 (internal control) as a high-risk audit committee concern.
Only 15% of those surveyed were satisfied with oversight of IT while 90% believed that IT oversight deserved more time at audit committee meetings. By constrast, 80% of committee members were satisfied with audit committee oversight of management judgments and estimates and 60% felt that committees were spending sufficient time on these issues.

Sounds like a great marketing opportunity for Gregory LaFollette, Brian Tankersley and others in the information technology industry. I do not find this result surprising; there seems to be more people who understand intermediate accounting than those who are up-to-date on information technology.

Limited posting this week

Because of a dog rescue situation that my wife and I have been involved and a visit from her brother and his kids this week, I probably will not post but once more between now and next Monday.

Senate Finance Committee Proposes Energy Tax Bill

The Senate committee emphasized energy infrastructure, energy efficient and tax credits for favored activities in their proposed legislation. Among the specifics: authorization for renewable energy bonds, business tax credits for cleaner coal facilities, microturbines and solar cells and extends personal tax credits for fuel cells and solar water heating.

Ruth Bell Graham, R.I.P.

Although easily lost in the shadow of her famous evangelist husband, Mrs. Graham was an impressive woman in her own right with participation in over a dozen books and helping to establish several organizations to help people in need. May God bless!

Updated IRS Form 990 on the Way

The Internal Revenue Service has just released a draft Form 990; its first update in over a quarter-century. Acting IRS Commissioner Kevin Brown says that the revised form (and related forms and schedules) is designed to make the financial results of exempt (nonprofit) entities more transparent. Most nonprofits will see little impact, but the new Form 990 means that larger and more complex exempt entities may require additional filing effort. A comment period is available until mid-September.

The new form is probably a positive, as long as "new and improved" does not parallel some consumer products and mean increased costs and taxes.

Certified Fraud Examiners: SOX Needs Darning

A survey of certified fraud examiners by Oversight Systems found that 76% of those surveyed believed that fraud was more prevalent than five years ago, the Sarbanes-Oxley Act nonwithstanding. Additionally, only three percent found that fraud was less prevalent and 43% believed that corporate viligance toward fraud prevention was starting to fade. Reasons for fraudulent behavior mirrored the fraud triangle with goal pressure and personal gains (incentives and pressures) being named by well over half the respondents and not getting caught (opportunity) and acts were not fraudulent (rationalization) also being named by at least 40%. Leadership tone was cited as the most important feature in fraud prevention with sophisicated monitoring and visible sanctions for those found fraudulent trailing the "tone at the top" by a sizable margin in second and third.

Several observations here: [1] As Hubert Humphrey once said: "morality cannot be legislated," [2]Although auditors have a role in preventing and detecting fraud, management MUST accept the primary responsibility.

More on the National Research Project from IRS

Some other bloggers and their comments on the new audit for 13,000 "lucky" taxpayers.

Kerry Kerstetter

Paul Caron

Joe Kristan

Robert Flach

"Big 4" plus BDO and "G-Thorn" Speak out on Tax Gap

Mega-CPA firms BDO Seidman, Deloitte, Ernst and Young, Grant Th0rnton, KPMG and PriceWaterhouseCoopers submitted a position ("white") paper to IRS Chairman Mark Everson last month commenting on the tax gap, including strategies for reducing the gap. Proposals included emphasis on areas with comparatively high noncompliance, improved use of technology and use of measurement milestones. The paper did not absolve the preparer community, indicating that some preparers either failed to obtain all facts needed or failed to be sufficiently viligant against noncompliance.

Hard to tell if this paper will accomplish anything more than a press release for the participating firms; I suspect that the IRS was already working on improving its use of technology and developing measures of compliance performance. The best idea in my mind is the initatives toward improving preparer performance. While education seminars are a good idea (and one that IRS is already using--albeit with too many held either at large coastal cities or resort communities); the best idea (albeit one that the IRS for the most part does not control) is simplification of the tax code.

The Return of the "Audit from Hell?"

The Internal Revenue Service announced plans to institute a new National Research Program to develop better audit selection approaches and reduce the purported $300 billion tap gap. In October, 13,000 taxpayers will be selected for an 2006 tax audit and a new "rolling three-year period" approach will allow the IRS to annually update its compliance and workload plans. Each following year, a similar number of returns will be audited.

I already extend sympathies for the taxpayers who will receive the October letters and hope that the IRS will at minimum be more personable than during the dreaded TCMP audits of the 1980s. Hopefully, the Taxpayer's Bill of Rights and National Taxpayers Advocate can protect taxpayers from some of the TCMP excesses.

Do Ethics and Innovation Correlate?

David Gebler of ethics firm Working Values acknowledges that none of the Top 20 Firms to Work for are members of the Ethics and Compliance Officers Association (ECOA) and only half of the Most Admired Companies have ECOA membership. Nevertheless, he asserts a linkage between ethics and innovation. To support the assertion, he cites Frank Daly at last year's ECOA conference--Daly argued that there may be a better linkage between employee happiness and ethics than between a formal ethics program and ethical behavior. Following Daly's line of argument, Gebler says that trust is based on respect and open communication and that satisfied employees will act ethically to protect their organization. Additionally, an environment of openness, respect and trust will encourage greater levels of creativity. By contrast, adding on ethical expectations to a "dog eat dog" management approach has an uncertain prospect of success as many employees might feel that they have to choose between competing goals.

Gebler's piece is well-thought out, especially for businesses and organizations in knowledge activities such as high-tech businesses, accounting firms and universities. Among other things, his arguments address both the incentive and rationalization points of the fraud triangle--trust and respect reduce the incentive to cheat and wanting to protect an organization is the opposite viewpoint of rationalizing fraudulent behavior.

Connecticut Attempts to Nutmeg GASB

Subtle pun alert: In soccer, to nutmeg means to move around a defender with the use of fancy footwork. Connecticut is referred to as the Nutmeg State.

The state senate of Connecticut is considering a bill which would allow the state auditor to establish GAAP which would supercede Governmental Accounting Standards Board generally accepted accounting principles (GASB GAAP). At present, Connecticut state law requires a balanced budget and GASB GAAP would put the state about $1 billion in deficit. Compliance with GASB GAAP would require about $150 million per year in some combination of increased revenue or decreased spending. Connecticut's proposed legislation, coming on the heels of Texan resistance to disclosing post-retirement health benefits, drew sharp criticism from Financial Accounting Foundation (parent organization of GASB) head Robert DeSantis, who said that the legislation would be a step backwards for public trust and accountability.

N.Z. Bear and fellow porkbusters--be alert! DeSantis' criticism is appropriate; in fact, private businesses already must take responsibility for their post-retirement benefits. Perhaps FAF, FASB and GASB should reconsider their home base of Stamford, CT if the legislation passes.

Tax Court: No Like-Kind Exchanges on Dual-Purpose Residences

In an end of May ruling, the Tax Court asserted that investment homes are not eligible for like-kind exchange treatment (deferred gain or loss) unless they are strictly held for investment. Two Georgia taxpayers which held the houses primarily for investment but in part as vacation homes. The Court, after dealing with procedural issues, said that expectation of house appreciation, lack of present presence in the houses and fact that neither home was a primary residence were not sufficient.

The ruling certainly means that taxpayers must be careful in filing when a vacation home is sold at a gain and probably also means that trading of time-share interests are subject to taxable gain status.