European Union "Green" Paper Proposal: Independence Uber Alles (Over All)

Accounting Age Report

A proposal by the European Union on audit firm operation goes to great lengths to emphasize firm independence and seems certain to create great controversy. Among concepts under consideration are bans on audit firms providing non-audit services such as tax planning and consulting to EVEN non-audit clients, required rotation of audit firms on large clients and limitation on proportion of fees obtained from a given client. The Institute of Chartered Accountants of England and Wales provided mild endorsement, stating that greater transparency on audit firm selection and implementation of International Standards on Auditing appeared to be positive features of the proposal while warning that the final document must consider unintended consequences.

While it is hard to imagine even the PCAOB or SEC going this far in audit firm regulation, doubtless the U. S. audit community, especially the "Big Four" and second tier firms such as Grant Thornton and BDO Seidman, will watch Europe's consideration of this proposal with great interest. Some in the US have called for mandatory audit firm rotation in the past and some further restriction on nonaudit services for audit providers of publicly-traded firms is at least conceivable here. Furthermore, there are some U. S. CPA firms which provide audit services for European companies and they could be impacted by Europe's decision.

Seven Accounting Changes Which COULD Affect Your Bottom Line

Jim Brendel of Smartpros has picked out the seven accounting changes occurring during 2010 which he believes have the greatest chances of affecting a company's financial statements. The first is "multiple deliverables"--an example would be a auto dealer who sells both a car and an extended warranty. The new standard requires only estimates of the value of each rather than objective measuremnt. The second major issue is software enabled devices such as "smartphones." Revenue can now be taken at time of sale rather than allocating over the shorter of the life or service contract period.

Five other topics with potential to affect business results include: more detailed fair value accounting disclosure (three levels of valuing inventory and sales); going to a qualitative standard for analyzing beneficiaries of variable interest entities, expanded XBRL reporting requirements for publicly-traded companies, greater latitude in non-GAAP note disclosures and (by contrast) greater scrunity on loss contingency disclosures. Topics to watch out for in 2011 include short-term borrowing disclosures, Dodd-Frank disclosures (especially top management compensation) and (of course) IFRS convergence.

Brendel seems to have some good insights here; while smaller businesses may not be affected by more than one or two, I could certainly see even a medium-sized business being affected by four or more of the seven items listed.

IRS Heads-Up on the Taxpayer Identification Test

A recent IRS announcement clarified that 78 topics in seven major areas: collecting taxpayer data, treatment of income and assets, deductions and credits, other taxes, completing the filing process, practices and procedures and finally ethics; would be tested on the new competency exams to establish Registered Paid Tax Preparers. In addition to passing the test, prospective Registered Tax Preparers (RTP) would have to pass a background check and obtain 15 hours of continuing education per year (vs. 16 hours under Treasury Circular 230). RTPs have until December 2013 to take the this exam if they have Provisional Preparer Identification Numbers (PPIN), but may take the exam as soon as it is made available. It appears that the Competency Exam will be available this fall and will run about 2-3 hours in length. EAs, CPAs and attorneys are exempted from the competency exam, at least for now. The Competency Exam, like the CPA exam and numerous other professional exams, will be given via Prometric. A fee of between $100 and $150 will likely be charged to take the exam; this is in addition to the annual $64.50 to be paid to the IRS. Candidates will have IRS Publication 17, Form 1040 and Form 1040 instructions available to them during the exam.

It is good to see some preliminary information about the Competency Exam. The facts that individual tax is the only area of taxation covered, that the exam is RELATIVELY short (less than half a day vs. two days for the CPA exam) and that materials will be able to students taking the exam suggests to me (perhaps overly cynically) that the test is designed more to raise revenue than to regulate entry to tax preparation. That said, I am sure that some tax preparers WILL be weeded out by the test, especially between now and December 2013.

Corporate Fraud in China? Fitch Says Look for More Allegations.

Credit-rater Fitch Ratings says that it expects additional complaints of accounting fraud to be leveled at Chinese-based businesses; though it also mentioned that some such allegations will be found to be without substance. Additonally, Moody's has listed "red flags" on some Chinese companies. A number of Chinese companies which are listed on US-based stock exchnages were recently hit with fraud allegations. Several Chinese firms have already been suspended or withdrawn from US stock exchanges and Moody's. Fitch seems to believe that many of the allegations will prove partially true and partially false and recommends that Chinese standard-setters and financial executives take a cue from Latin America in regard to improved corporate governance.

Financial fraud is one of the most devastating blows to an effective stock market that exists. Given the woeful returns on many US-based investments; investing in global markets has become increasingly popular; just make sure before you invest to test whether supporting documents, such as financial statements, are reasonably trustworthy.

Don't Use SSNs to Mess with the IRS!

LONG before anyone had ever heard of Barack Obama, rumors of voter fraud in Chicago have run rampant. Examples of such rumors include voter registration drives at cemetaries and sayings such as "If you only voted twice, you are a slacker." Two tax preparers, one in NYC and one in Southern California tried their own variation on "Chicago" voting tactics--but their frauds found deep trouble with the Internal Revenue Service instead. Davis Johnson of the Bronx was sentenced to 63 months (over five years) in prison for such acts as including Social Security Numbers of dead children to inflate the number of exemptions claimed by clients. Meanwhile, Norma Cornell pleaded guilty to several felony counts of claiming 20 more children as dependents than what she actually had. Cornell also filed fraudulent tax returns for other family members and clients and potentially could recieve over 100 years of prison sentences for her frauds.

While Johnson and Cornell are extreme examples, either misstating number of dependents or falsely using a SSN of a deceased person to inflate exemptions is a comparatively easy return flaw for the IRS to catch. As the old saying goes: "Don't do the crime if you can't do the time."