Well……It Depends

I can only imagine some of the more interesting conversations that CPAs are having with their individual tax clients these days, in response to the inevitable question that comes up every year as the attention shifts from the prior year’s tax return to planning for the current year…….. “Ok, so what should I do?”

It seems like only yesterday that Congress and President Obama were at a virtual impasse over extending the Bush tax cuts for higher-income individuals as well as the pending reversion of the estate and gift tax regime to the pre-2001 rate structure. In an 11th hour compromise following the 2010 Congressional elections, Congress and the White House settled on a two-year extension of the current rate structure as well as a liberalized estate and gift tax regime, about two-weeks before an across-the-board tax increase for all taxpayers and a draconian transfer tax structure that no one supported would have become law.

Well, before too long it will be déjà vu all over again, with some additional wrinkles. Under current law, ordinary individual income tax rates are scheduled to rise virtually across the board on January 1, 2013, as are rates on long-term capital gains and qualified dividends. The standard deduction for married taxpayers will revert to a lower level than the combined amount for unmarried taxpayers, and the expanded 15% tax bracket for married taxpayers sunsets, bringing back the marriage penalty. Phase-outs of itemized deductions and personal exemptions for taxpayers exceeding certain income thresholds will be restored, and the child tax credit will be cut in half. And for estate and gift tax purposes, we are scheduled to see a drop in the exemption from $5 million to $1 million and an increase in the top rate from 35% to 55%. But that’s just the beginning. On top of these provisions, the health care legislation imposes an additional 0.9% Medicare tax on employees and self-employed individuals and a 3.8% tax on investment income of individuals with AGIs exceeding $200,000 (singles) and $250,000 (marrieds), beginning in 2013. And although it’s only in the proposal stage and unlikely to advance through the House before the elections, President Obama has endorsed a new minimum tax he calls the Buffett Rule for taxpayers earning more than $1 million.

So that’s the backdrop for responding to the “OK, what should I do?” question. While not dodging the issue, the prudent response may be to answer the question with another question….”What do you think is going to happen with the economy, unemployment, the budget, and the elections?” To a great extent these are the issues that will shape federal tax policy for 2013 and beyond.

Seasoned (or maybe cynical) Washington observers suggest that history will repeat itself in late 2012, with a lame-duck Congress enacting another short-term extension of the expiring tax breaks in the name of supporting the economic recovery, leaving it to the new Congress and administration to find a permanent solution in 2013 or 2014. While there is general agreement that lower income tax rates and marriage penalty relief are desirable for lower and middle income taxpayers, along with at least a $3.5 million estate tax exemption, there simply won’t be enough time after the November 6 election to resolve the more contentious issues. Perhaps something like the Buffett Rule or a compromise on the estate tax could sneak in as an 11th hour bargaining chip, but for the most part I believe we will enter 2013 with the 2012 tax structure largely intact for the near term. That said, I wouldn’t be shocked to see entrenched partisan positions in a lame duck Congress result in a gridlock scenario that causes the 2013 Congress to have to take up taxes as its first order of business.

Beyond considering the likelihood of a short-term extension of the current rate structure, it may be worthwhile to engage higher income clients in a multi-year, multi-scenario tax planning exercise. If President Obama and the Democrats come out of the elections with the wind at their backs, we may be looking at a scenario of higher income tax rates for upper income clients. Conversely, pressure to look at fundamental corporate and individual tax reform as part of a broader economic policy review could drive a scenario of lower tax rates with fewer tax ‘expenditures,’ or targeted benefits like the exclusion for employer-provided health insurance, lower rates on capital gains and dividends, and deductions for mortgage interest, charitable contributions, and state and local taxes. A number of credible tax reform proposals in recent years (Bowles-Simpson, Paul Ryan, Gang of Six, and Domenici-Rivlin) have recommended a top individual rate under 30% with various limitations on tax expenditures as a tradeoff for lowering the rates. It’s not a stretch to see a rate structure with lower tax rates and a less generous mortgage interest deduction, no state income or sales tax deduction, or even a cap on total itemized deductions as a percentage of AGI. Nor would I be surprised to see the tax on ‘Cadillac’ health care plans (scheduled to begin in 2018) be replaced by a tax on ‘Chevy’ health care plans where employee health care benefits above a moderate threshold are included in taxable compensation. It’s also not a stretch to imagine a scenario like we saw with the Tax Reform Act of 1986 where ordinary income, dividends, and capital gains were all taxed at the same rate. Democrats may find such proposals palatable as a means to reducing the deficit via the tax code and promoting progressivity, while Republicans can point to tax reform as cutting government subsidies and reducing the size of government while reducing the deficit and increasing overall economic efficiency. In any event, it would be wise to compartmentalize the various types of income for high income clients and look at the impact of the various proposals on each type – investment income, business (including pass-through) income, ordinary income, and retirement income, as well as their impact on itemized deductions.

Conclusion

There’s no question that the uncertainty surrounding the future of the federal tax code makes tax planning difficult. There’s no doubt there are a number of ways it can play out over the next few years. That said, upper income clients would be well served by a multi-year, multi-scenario planning exercise that contemplates a variety of legislative outcomes. At some level, failing to plan is planning to fail.

Let’s Make a Deal

Maybe Rick Perry was right. These debates are more like a sideshow, more about personalities and taking the spotlight off the substantive issues facing the country. What if, instead of getting to know our candidates through a series of debates (that aren’t really debates), we followed the format of the 1980s hit game show, Let’s Make a Deal, whereby each of the candidates’ policies, platforms, and proposals are presented from behind a closed door without any visual clues as to which candidates are proposing which plans, so the voters get to decide on the policies rather than personalities. Sound like a deal? Monty Hall, come on down!
With regard to proposed tax policy, President Obama’s position is known – allow the expiration of the Bush tax cuts on ordinary income, dividends, and capital gains for higher income individuals to occur, beginning in 2013, along with imposition of the yet-to-be-defined Buffett Rule for the “fortunate few;” capping the benefit of itemized deductions at 28%; returning the estate tax to the 2009 structure of a 45% tax rate and a $3.5 million exemption; eliminating LIFO and tax preferences for the energy industry; and a host of international tax provisions to minimize the incentives to shift income and assets overseas.
Against that backdrop, let’s take a look at the most prominent Republican tax proposals, each from behind a different door:

Door # 1

This candidate has proposed a tax plan that while sweeping in scope, retains the basic framework of the existing Code. This “Time to Compete” plan would eliminate all itemized deductions and credits for individuals while reducing the rate structure to 8%, 14%, and 23% and eliminating the Alternative Minimum Tax and taxes on dividends and capital gains. The plan would reduce the top corporate rate to 25%, shift to a territorial tax system, taxing income only in the country where it is earned, and provide a tax holiday for the repatriation of corporate profits currently held overseas. And noteworthy for CPAs, this plan would repeal section 404 of Sarbanes Oxley.

Door # 2

The “Believe In America” plan would cut the corporate tax rate from 35% to 25%, while implementing a territorial tax system that would equalize tax rates on corporate profits earned overseas. The plan would also eliminate the estate tax, as well as tax on interest, dividends and capital gains for those earning less than $200,000 a year. This candidate would otherwise retain the current tax rate structure, making the Bush tax cuts permanent and retaining current deductions. The candidate has also alluded to a long-term plan to lower rates and reduce tax preferences, without providing specifics.

Door # 3

This is the plan Jimmy Buffet has been waiting for. The “Cut, Balance, and Grow” plan would offer individuals a choice between filing under the current system with a top rate of 35% or a flat rate of 20% and no AMT. The latter structure would eliminate tax on social security benefits, dividends and capital gains as well as the estate tax. Each individual in the flat tax scheme would be entitled to a standard deduction of $12,500, thus eliminating income tax altogether for a family of four making less than $50,000, countering the argument that a flat tax is inherently regressive. The standard deduction would begin to phase out when AGI reaches $500,000, countering the assertion that the plan favors the rich. The flat tax plan would retain itemized deductions for mortgage interest, charitable contributions, and state and local taxes, avoiding pressure from the real estate, nonprofit, and local government lobbies. The plan would lower the corporate tax rate to 20%, transition to a territorial system, and allow multinationals to repatriate foreign earnings at a 5.25% tax rate for a temporary period. This candidate’s plan would also repeal section 404 of Sarbanes Oxley.

Door # 4

This plan would impose a low, single-digit tax rate on individual income, corporate profits, and on consumption. The charitable contributions deduction for individuals would be retained, while payroll taxes and taxes on capital gains would be eliminated. Households below the poverty level would be exempt from the income tax, and deductions would be available for folks living or working in Federal Empowerment Zones, thus countering attacks the plan is regressive. The tax on corporate profits would be applied to gross income less purchases, investments, and dividends, and the plan would eliminate tax on repatriated earnings. Critics call the plan a flat tax on middle-class labor. The candidate has made some noise about eventually replacing the income tax with a national sales tax, but few specifics have been revealed at this time.

Door # 5

This candidate’s Jobs and Prosperity Plan includes an optional 15% flat tax for individual taxpayers, retaining the charitable contributions deduction. Taxpayers could file under the existing system if they so choose, ensuring no one is forced into a tax increase. The flat tax scheme would eliminate tax on interest, dividend, and capital gains, but retain the earned income and child tax credits, to deflect criticism that it is regressive. Charitable contributions and home mortgage interest could be deducted, but not state and local taxes, and a $12,000 personal exemption would be allowed for each individual. The estate tax would be eliminated. This plan would impose a 12.5% tax on corporate income, eliminate capital gains tax for corporations, allow immediate expensing of new equipment, eventually replace the payroll tax with personal accounts, and tax foreign profits at the same rate as domestic income.

Conclusion

So, a question for our Republican members…..without reflecting on the personalities, which plan do you choose? If it’s not apparent, behind Door #1 is Jon Huntsman; behind Door #2 is Mitt Romney; Rick Perry lies waiting behind Door #3; Herman Cain’s 9-9-9 Plan is behind Door #4; and Newt Gingrich is behind Door #5.
There is no doubt that taxes will take center stage during the 2012 election cycle. The differences between the two parties are extreme: President Obama believes the wealthy and higher income folks should shoulder more of the tax load, while Republicans generally believe lower rates will spur the economy and job creation. While the best plan may be somewhere in between, voters will ultimately choose the path forward.

What If CPAs Ran the Country?

Background

Imagine that you are an audit partner asked to bid on a new engagement and a quick glance over the prior year’s unaudited financials shows a negative net worth of $44 million, an operating loss of $817 thousand, and a negative cash flow of $1.3 million. Would you bid on the job? Accept the engagement? Your first thought would probably be “Is this a going concern?”

Now imagine that instead of bidding on the audit, you are a consulting partner and asked by the board of directors to come in and review the company’s strategy and operations and make recommendations to turn the company around (and they agree to pay your fee up front).

You learn that the board is looking for a strategy to grow the business at 5% a year. You ask a few questions and find out that while board members are in agreement for the need to cut costs, they can’t agree on which costs to cut. Dig a little deeper and you find out that the annual budget is prepared on the cash basis, and there are about $31 million of off-balance sheet liabilities, mostly unfunded future pension and health care costs not reflected in the budget. Talk to a few board members and you learn that aside from these off-balance sheet liabilities and other one-time costs, the enterprise has reported a 4% net profit over the past 15 years, which is the picture senior management has been presenting to the board, keeping everyone content, until recently. And by the way, they tell you that while still the market leader, the company has been losing ground to competitors for the last decade, and that competitors hold 46% of the company’s debt. Finally, you review a credit report that expresses serious concerns about the organization’s ability to repay its debt. A quick back of the envelope calculation shows that in 15 years the organization’s obligations for health care and retirement expenses, plus interest on its debt will completely absorb all of its revenue. Accordingly, you clearly understand the board’s sense of urgency and the need for a restructuring specialist and accept the engagement.

The Engagement

The first thing you do is address the shareholders. You make it totally clear that long-term survival of the enterprise will be based on prudent cost management. You let them know that you will be focusing on the fundamental problems and underlying causes, not merely the symptoms.

Next comes a SWOT analysis, a candid look at the strengths, weaknesses, opportunities and threats facing the organization, including the competitive environment. As part of the SWOT analysis you bring in your due diligence team to evaluate the performance of the various lines of business, both core business lines and extensions, as well as the organization’s performance across its 50 geographic territories. You learn, not surprisingly, that some business lines and territories are out-performing others, and you note the ones that will require additional investment, ones that need to be scaled back, outsourced, or sold off. You also look at processes that can be automated and where technology can be applied, to ensure that each line of business is operating at maximum efficiency.

Your next area of focus is on the budgeting and financial reporting process. Clearly the board, shareholders, investors, and creditors are not consistently getting the full picture, as the budgeting process has historically focused only on current operations, ignoring the fundamental, or structural imbalance between receipts and disbursements resulting from the off balance sheet liabilities. You explain to the board that the budgeting process is where resource allocations and strategic priorities need to be addressed and the foundation for long-term success laid. While there are always tradeoffs, a good budgeting process will provide multiple parties the opportunity to present their recommendations, at the end of the day the chief executive and chief financial officer must sign off on the commitment of scarce resources in the pursuit of the organization’s aspirations as well as its most fundamental needs. Once the new budgeting process is in place you can identify the metrics and performance measures to help senior management make more informed decisions. Finally, once you have the completed the annual budget for the coming year, you can develop a financial forecast for the short term, medium term, and long term, which will be in your report to the board.

As part of the budget review you bring in your H.R. consulting team for a comprehensive review of the company’s organization structure and compensation practices. You learn that the company grew headcount 2% in 2008 and another 3% in 2009, while other organizations were cutting back, and it has been paying its employees at significant premiums relative to market rates. Further you learn that the majority of employees still participate in defined benefit pension plans, even though such plans are increasingly rare in other organizations. You conclude that what the organization needs is a performance-based culture focused on cost savings and operating efficiency with an incentive compensation program that ties bonus payouts to increasing the productivity of workers and meeting annual expense reduction targets. Further, it is evident that the enterprise must optimize its cost structure, including headcount, compensation, and benefits relative to industry norms.

Next Steps

Now that you’ve addressed the operational and H.R. issues, you understand that to complete the engagement you must drill down into the more strategic issues – restructuring the organization’s debt and revenue models in a way that will drive sustainable growth and lead to long-term solvency and a winning competitive position. To help with those formidable tasks, you appoint a super committee of board members to review all available options, with “everything on the table,” and make recommendations for at least $1.5 million in cash flow improvement over the next 10 years. The alternative, you tell them, is across-the-board spending cuts, which nobody seems to want.

Your final task will be an evaluation of senior management’s performance. Your recommendations will be considered at a shareholder’s meeting on November 6, 2012.

Stay tuned.

Note: This article is a CPA-centric adaptation of a report titled USA, Inc., by Mary Meeker, former analyst with Merrill Lynch and Morgan Stanley, and current partner with venture capital firm Kleiner, Perkins, Caufield, and Byers. You can access the complete report at www.kpcb.com. Note that you can multiply each of the above dollar amounts by one million to see the actual amounts for “the enterprise.”

The New Normal Revisited

Two years ago, we explored in this column a concept that Ian Davis, worldwide managing director at McKinsey & Co., referred to as The New Normal. Davis suggested that the economic downturn was not merely another periodic dip in the business cycle, but a fundamental change in the business landscape, a restructuring of the economic order, and that we would emerge from the economic downturn in a new place. While this was a sobering and thought provoking view, Davis concluded that the new normal would not necessarily be a bad thing, and in fact, would open up a world rich in possibilities for those who are prepared.

Two years later, with 20-20 hindsight, do we believe Ian Davis was clairvoyant? Are we in a new place, a new economic order? Or could we be in a period of transition? Let’s take a quick tour of the CPA practice and regulatory environment to find out.

CPA Practice Environment

No doubt, many CPA firms across the country have experienced challenging times of late. According to an Accounting Today survey, Top 100 firms collectively reported a 2% aggregate revenue decline in 2010, including declines by three of the Big Four and 19 of the Top 25 firms. They managed their bottom lines like most businesses do during challenging economic times, by cutting expenses. 54 of the Top 100 firms, including 19 of Top 25, laid off staff, and 37 eliminated partner positions. Considering that only a few years before, double-digit revenue growth was common for firms of all sizes, this does sound like a new normal. Looking forward, however, firms are a bit more optimistic. Various surveys point to improving prospects for growth in 2011 and beyond. 57% of firms are expecting revenue growth in 2011 (PCPS/TSCPA MAP Survey), with fees and net income growing in the 3%-4% range according to a survey of firms by consultant Marc Rosenberg.

Look across the practice landscape and you do see a changing environment, with an intensifying level of merger and acquisition activity among firms of all sizes. Firms are looking at M&A as a source of expanded service offerings, economies of scale, geographic diversification, acquisition of talent, and certainly, as an ownership succession strategy. While the trade journals are quick to report the mega-mergers of regional firms, there are plenty of $10 million firms acquiring $1million firms, as well as horizontal mergers of $ 1- 2 million firms. And as the world continue to globalize, international M&A activity will begin to accelerate as well.

As a result of firm consolidation and the economic developments over the past three years, firms are experiencing an increasingly competitive environment with downward pressure on fees one of their biggest challenges. As a result of this increasingly competitive environment, firms are increasing their marketing spend and elevating their focus on practice development. A recent Rosenberg survey found that marketing and practice development ranked #1 in its list of Top 10 strategic trends. Similarly, the 2011 AICPA PCPS Top Issues survey showed that bringing in new clients and retaining existing clients is top of mind for firms of all sizes, and that fee pressure and pricing of services are not far behind.

Rapidly Changing Regulatory Environment

Also among the top issues cited by practitioners are keeping up with changing accounting and attestation standards and the changes and complexity of the tax laws. Based on my personal interactions with practitioners, the evolution of accounting standards has become the top area of concern, if not fear. We are currently going down a path of convergence of selected FASB and IASB standards, although the convergence process is not hitting its milestones. On a parallel path the SEC is scheduled to announce its position on IFRS for U.S. public companies by the end of the year. It could range from an outright requirement to adopt IFRS by a date certain, to an option to convert, leaving it up to individual registrants, or a hybrid approach by which U.S. GAAP would continue to exist, convergence would continue, and FASB would utilize an ‘endorsement’ process to evaluate new standards issued by the IASB for incorporation into U.S. GAAP, with or without modification.

Regardless of the SEC’s ultimate position on its IFRS, U.S. subsidiaries of foreign-owned companies and U.S. companies with foreign subsidiaries are converting to IFRS in increasing numbers, creating many opportunities for CPAs. Clients have to be educated and new accounting policies drafted. Compensation and benefit plans may have to be restructured; loan covenants and contracts renegotiated, accounting systems overhauled, and owner / shareholder expectations managed. Tax planning will be significantly impacted as well, as the Internal Revenue Code contains hundreds of references to generally accepted accounting principles that will have to be re-evaluated.

On a parallel path the Financial Accounting Foundation (FAF) is evaluating a new standard-setting model for nonpublic companies that follow U.S. GAAP, with exceptions. One thing to keep in mind as this process unfolds is the demand for private company GAAP will likely become even more acute if SEC mandates IFRS for public companies, consistent with other countries that are keeping national GAAP for private companies. It’s also worth noting that FAF now is including nonprofit entities in the scope of its deliberations, whereas the Blue Ribbon Panel specifically excluded nonprofits.

The Changing Tax Landscape

It increasingly appears that federal tax reform will be front one of the front burner issues during the 2012 political season. Congress will be taking a critical look at the overall tax structure for corporations, individuals, and estates, as the “Bush tax cuts” are scheduled to expire once again at December 31, 2012. It will also be looking at the compliance function (e.g., penalty provisions) as part of its ongoing quest to reduce the tax gap. This debate will be set against a backdrop of bringing down the deficit, making the U.S. more competitive in the global economy and stimulating job formation in the U.S.

We can probably expect tax reform proposals to include noncontroversial simplification provisions like consolidating child benefits, retirement benefits, and education benefits, simplifying the kiddie tax, and eliminating the individual and corporate AMT. They will hopefully address persistently troublesome areas like worker classification, the earned income credit, the myriad of phase outs, and neutralizing debt and equity financing of businesses. They will likely include base broadening, tax expenditure eliminating proposals similar to the ones suggested by the Deficit Commission et al. This will be the contentious part, as sacred cows like mortgage interest, state and local tax and charitable contribution deductions will be on the table, along with the exclusions for employer-provided health insurance and municipal bond interest. On the corporate side, tax expenditures include accelerated depreciation, the U.S. manufacturing deduction, the R&D credit, LIFO, the low income housing credit, and the deferral of CFC (foreign) income. Other contentious issues that have been floated recently include taxing large pass-through entities as corporations, broadening the social security wage base, modifying rules on valuation discounts, and eliminating fossil fuel preferences.

The More Things Change….

CPAs generally thrive during times of disruption in the status quo. Successful CPAs look at the problems their clients are experiencing at any point in time and see opportunities.

For many clients, the volume of regulatory change is unsettling and the level of complexity overwhelming. For them, this is the new normal. For CPA firms, it should be marked by an increased demand for CPA services, a reversal of the downward pressure on fees, and hopefully a return to a period of double digit growth. As Ian Davis of McKinsey might say, this new normal will open up a world rich in possibilities for CPAs who are prepared.

The Best Album of All Time

As I was recently participating in the AICPA’s CPA Horizons 2025 survey and asked to opine on the Top 5 issues facing the accounting profession over the next 12 months, five years, and by 2025, I was reminded of a recent conversation about the best album of all time. I thought that was an easy one……The Beatles White Album, right? As we discussed it, however, we thought of a few more great albums, then a few more, and then a few more that deserved our consideration. Before I knew it, we had compiled a Top 25 list. Similarly, when thinking about the top issues or trends facing the accounting profession, it seems like an almost endless list of changing dynamics that will shape the profession in the years ahead. The rapidly consolidating and increasingly competitive CPA firm marketplace, globalization, demographic trends and the multigenerational workforce, new platforms for communication, a burgeoning entrepreneurial environment, technology-enabled mobility and telecommuting, immigration and multiculturalism, ever-increasing complexity, the convergence of information and software, sustainability, and the evolution of key industries like energy and healthcare will each have a profound impact on the profession. That said, given that generally accepted accounting principles and / or the federal tax code constitutes the foundation of most CPAs’ body of work, two issues rise to the top of any conversation about the most impactful trends facing the profession in the years ahead.

Accounting Standards Evolution

Everyone by now has at least heard of International Financial Reporting Standards (IFRS) and that the U.S. is one of the only industrialized nations not in synch with the rest of the world. We are currently going down a path of convergence of selected FASB and IASB standards under a 2006 Memorandum of Understanding. That project is supposed to be completed this year, but so far the convergence process is not hitting its milestones. On a parallel path the SEC is pursuing a Work Plan whereby it is scheduled to announce its position on IFRS for U.S. public companies by the end of the year. It could range from an outright requirement to adopt IFRS by a date certain (say 2016), to an option to convert, leaving it up to individual registrants, or a hybrid condorsement approach. With condorsement, first mentioned (and I don’t think by accident) by SEC Chief Accountant James Kroeker, U.S. GAAP would continue to exist. FASB and IASB would finish their joint convergence projects, then FASB would work to converge remaining U.S. GAAP with IFRS over a period of time. FASB would also utilize an ‘endorsement’ process, similar to that used in the E.U., to consider new standards issued by the IASB for incorporation into U.S. GAAP, with or without modification. This condorsement approach would move the U.S. gradually toward IFRS but allow FASB to retain control over U.S. GAAP and reduce the effort and risks associated with a full scale, mandated switch to IFRS.
What happens in the nonpublic company arena is another story altogether. In February, the Blue Ribbon Panel recommended a separate board under the oversight of the Financial Accounting Foundation (FAF) be established to develop a new standard-setting model that follows U.S. GAAP, with exceptions for private companies. The FAF has formed a working group to obtain input and issue an action plan later this year to address whether or how to devise rules that differ from those of public companies. One thing to keep in mind as this process unfolds is the demand for private company GAAP will likely become even more acute if SEC mandates IFRS for public companies, a framework consistent with other countries, as Canada, UK, others are keeping national GAAP for private companies. It’s also worth noting that FAF now is including nonprofit entities in the scope of their deliberations, whereas the Blue Ribbon Panel specifically excluded nonprofits.

U.S. Deficits and Federal Tax Reform

As the current imbroglio over raising the debt ceiling has illustrated, the debate over solutions to the U.S. fiscal crisis will likely become the center of the 2012 presidential campaigns. While no one expects serious action before 2013, the likelihood that federal tax reform will be one of the key elements of the debate is increasing as each new proposal is floated. From the National Commission on Fiscal Responsibility and Reform (aka Deficit Commission), to the Domenici-Rivlin Plan, to Congressman Paul Ryan’s Path to Prosperity (adopted by the House of Representatives), to the Gang of Six to President Obama himself, each proposal favors lowering the corporate tax rate and broadening the base by reducing or eliminating tax expenditures. The problem is that most US businesses are pass through entities, which brings individual taxation into the tax reform discussion. Ernst and Young recently published a study showing that small business owners’ tax liability would increase by approximately 8% if corporate rate lowering and base broadening were enacted. This leads directly into individual tax reform, which is much more politically dicey, especially at this point in the political cycle. A similar political challenge is the fallout from creating winners (via rate reduction) and losers (from the loss of targeted tax incentives that would be eliminated) that would certainly occur with such an approach to tax reform.
In any serious tax reform efforts, I believe we’ll see an evolution of the current system as opposed to a more radical approach like a value added tax (VAT). It will probably begin with noncontroversial simplification proposals like those recommended by the Volker Commission – consolidating child benefits, retirement benefits, and education benefits, simplifying the kiddie tax, and eliminating the individual and corporate AMT. It should also address persistently troublesome areas like worker classification, the earned income credit, the myriad of phase outs, and neutralizing debt and equity financing of businesses. It will probably include increased funding for technology initiatives at the IRS, like XBRL for tax reporting and Commissioner Schulman’s vision for a 21st Century return filing process whereby the taxpayer or preparer downloads a 1040 pre-populated with 1099 and W-2 data from irs.gov, adds whatever additional information is necessary to complete the return, and electronically submits. The reform efforts will also include base broadening, tax expenditure eliminating proposals similar to the ones suggested by the Deficit Commission et al. This will be the contentious part, as sacred cows like mortgage interest, state and local tax and charitable contribution deductions will be on the table, along with the exclusions for employer-provided health insurance and municipal bond interest. On the corporate side, tax expenditures include accelerated depreciation, the U.S. manufacturing deduction, the R&D credit, LIFO, the low income housing credit, and the deferral of CFC (foreign) income. In one recent proposal, conservative economist and former Reagan advisor Martin Feldstein provided what may be a model to overcome the political hurdles tax reform will face. Feldstein suggested in a recent New York Times op-ed that a cap on the tax reduction from tax expenditures, calculated as a percentage of adjusted gross income, would be a way to eliminate the revenue drain from tax expenditures without eliminating individual deductions. The cap would not determine the amount of an individual deduction or exclusion, so individuals would continue to benefit from their chosen tax benefits, up to the amount of the cap. Given political realities, it will take some creative policy making and effective legislation drafting to make tax reform happen, but Feldman’s proposal may provide a blueprint for a bipartisan solution. Finally, reform will likely address certain global realities, including a territorial tax system that has been proposed for multinationals, enabling income to be taxed in the territory where it is earned.

Conclusion

In a sense, we’ve just scratched the surface when thinking about issues and trends that will shape the accounting profession in years ahead. In any scenario, however, it’s hard to imagine that accounting standards evolution and federal tax reform would not be part of the conversation. But like trying to pick the top album or top song of all time, the list just keeps on growing.....stay tuned.

Fundamental Tax Reform: Political and Policy Issues

In his State of the Union address, President Obama lobbed an opening salvo on the subject of tax reform. Without providing any details, the President told the nation and Congress he supports lowering the corporate tax rate without adding to the deficit, within the context of making US businesses more competitive, stimulating the domestic economy, and creating American jobs. It sounds good, like mom and apple pie, until you start peeling back the covers. When Mr. Obama made the reference to not adding to the deficit, did he necessarily mean ‘deficit-neutral’? Or did he mean that lowering the rate should be part of a broader package of deficit reduction, which could imply raising overall revenue while lowering the corporate tax rate? Many observers were hoping the answers to these questions would be unveiled in the President’s 2012 budget, which unfortunately did not happen, as the budget was disappointingly void of any mention of tax reform.

In either situation however, lowering the rate without adding to the deficit by definition implies offsetting the rate cut with elimination of tax expenditures, those special exclusions, exemptions, and deductions from gross income, preferential tax rates, credits, and tax liability deferrals that provide tax benefits to particular taxpayers. On the corporate side, tax expenditures include accelerated depreciation, the U.S. manufacturing deduction, the R&D credit, LIFO, the low income housing credit, and the deferral of CFC (foreign) income. The Wall Street Journal provided a great view into the world of corporate tax expenditures when, in a recent editorial supporting corporate tax reform, told how Whirlpool has amassed more than $500 million in green energy credits that brought its current effective tax rate to zero, and due to carryover provisions, “it may not have to pay a dime of corporate income tax for years.” And Whirlpool is not an isolated case. Google saved over $3 billion in the last three years using a technique that moved most of its foreign profits through Ireland and the Netherlands to Bermuda, reducing its effective overseas tax rate to 2.4%, according to Bloomberg.

While President Obama has focused mostly on business tax reform, a much cleaner political debate than comprehensive tax reform that covers all taxpayers, it’s important to remember that these corporate tax breaks, which the President keeps referring to as loopholes, are not limited to C corporations; they pass through to S corporation shareholders and LLC members as well. And if we expand the discussion to include individual tax rate reduction, which at some level will be necessary because of the high percentage of businesses organized as pass-through entities, tax expenditures will include lower tax rate on dividends and long-term capital gains, the exclusion of municipal bond interest income, the exclusion of employer-provided health insurance, the exclusion of gain on home sales, retirement and education savings incentives, the home mortgage interest deduction, state and local tax deductions, the charitable contributions deduction, and the earned income credit. Thus it’s easy to see that tax expenditures affect the majority of all taxpayers in some way, which makes the politics really tricky. As National Taxpayer Advocate Nina Olson testified before the Ways and Means Committee recently, “In short, we are all special interests.”

Companies that don’t take advantage of tax expenditures welcome the President’s proposal to lower the rates and eliminate the ‘loopholes.’ On the other hand, multinationals and others that enjoy a relatively low effective tax rate today could feel a negative impact from a revenue-neutral policy that would certainly create winners and losers. For this reason, and despite the fact that corporate tax reform (i.e., rate reduction and base broadening) seems to have momentum, don’t look for any type of tax reform to occur in the immediate future. Some level of broad-based support among the business community will be necessary for tax reform to move forward. As we saw with the 1986 tax reform, it takes years of behind-the-scenes maneuvering to build a consensus among widely divergent interests.

Just to frame the debate, legislators and administration officials will have to reach agreement, at least directionally, on whether to focus on revenue neutrality and tax reform in a vacuum or tax reform as part of a larger package of deficit reduction; whether to include individual tax reform along with corporate tax reform; whether to continue the present system of taxing worldwide business income versus a more territorial approach and whether to have a repatriation holiday; the preferable tax treatment of debt versus equity financing for businesses; the level of services the government is to provide; and the distribution of the tax burden across the universe of taxpayers.

Beyond framing the debate, Congressional leaders realize that sound change management principles require the voting public to be educated and share a sense of urgency about the federal debt for tax reform to be politically safe. To that end, several public education campaigns focusing on the deficit have emerged recently, and I expect we’ll be hearing more and more about the consequences of inaction to rein in the federal debt, especially as we move into the next election cycle. Further, when Congress needs to buy more time, it typically commissions a study. That’s where we are today. In mid-March, the chairmen of the congressional tax writing committees, Rep. David Camp, Ways and Means, and Sen. Max Baucus, Senate Finance, instructed the Joint Committee on Taxation to undertake “specific research” that will help Congress enact comprehensive tax reform. Mr. Camp will chair the Joint Committee in 2011 and Mr. Baucus will chair the Committee in 2012. The research will provide Congress data showing the impact of potential changes to the Internal Revenue Code.

As the debate over tax reform plays out, CPAs can play an important role in this process, educating both themselves and their clients and employers about the issues and alternatives. Future installments in this series will explore alternative proposals for tax reform that will be considered as the debate unfolds, the cast of characters involved, and criteria for evaluating the various proposals.

Fundamental Tax Reform: Here We Go Again

Every few years, federal tax reform seems to resurface as a front-burner issue. The Reagan years brought us the Internal Revenue Code of 1986, which broadened the tax base, flattened the rates, took on the tax shelters with concepts such as passive activity losses, and expanded the alternative minimum tax. In 1996 we saw the emergence of a number of simplification proposals and Congressional hearings on alternative tax systems, including the Flat Tax promoted by Texas Congressman and House Majority Leader Dick Armey, a national sales tax favored by Ways and Means Committee Chairman Bill Archer, another Texan, a value-added tax, and the Nunn-Domenici USA (Unlimited Savings Account) Tax, a hybrid model. While these proposals were front page news for awhile, enthusiasm for fundamental tax reform eventually died down, partially because there were no clear-cut transition plans and partially because the Internet took off and the nation’s focus turned in a different direction. In 2005, President George W. Bush’s Advisory Panel on Federal Tax Reform released two alternative plans that promptly went nowhere, as the nation became preoccupied first by Iraq and then the recession.

President Obama’s Turn

In 2009, President Obama appointed Former Fed Chairman Paul Volcker to chair an advisory board to look at ways to reform the current system. The Board produced some common-sense recommendations most tax practitioners would have intuitively embraced such as consolidating child benefits, retirement benefits, and education benefits, simplifying the kiddie tax, and eliminating the AMT. Interestingly, it was not the Volcker Commission but President Obama’s bipartisan National Commission on Fiscal Responsibility and Reform that seemed to garner the most attention with its recommendations for putting the nation on a more sustainable fiscal course over the long haul. Among the Commission’s recommendations were lower rates for both individuals and corporations and reducing the size and number of “tax expenditures.” The President’s reaction, while tempered, was supportive, and ironically the report may have laid the groundwork for his taking the deficit reduction issue and all that implies (e.g., tax reform) as one of his signature issues for the 2012 campaign. As a proactive first step, the Administration initiated a dialog with business leaders on ways to stimulate economic growth and employment opportunities in the U.S., and it seems the President and his corporate advisors have coalesced around corporate tax reform as a catalyst for investment in the U.S. that would drive economic growth and reduce unemployment.

The Taxpayer’s Advocate

On a parallel path, the 2011 annual report to Congress by National Taxpayer Advocate Nina Olsen identified tax reform as the number one priority in federal tax administration. In releasing her report, Olsen echoed the near universal sentiment that “the tax code is broken and needs to be fixed.” Some of the more interesting data points from the report include:
• Taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements, requiring the equivalent of more than three million full-time workers;
• Tax expenditures, including income exclusions, exemptions, and deductions from gross income, plus credits, preferential tax rates, and tax deferrals total about $1.1 trillion annually, an average reduction in tax per individual return of about $8,000; and
• Among taxpayers who have a choice about reporting their income, compliance rates are well under 50%, with Schedule C taxpayers reporting only 43% of their actual business income and Schedule F taxpayers reporting only 28%. The predominant reasons cited for noncompliance are complexity of the tax code and a perceived lack of fairness.
Ms. Olsen advocates fundamental tax reform, not merely ad hoc simplification, beginning with a general premise that tax expenditures for both individuals and businesses should be avoided. Further, the report suggests public policy objectives such as increasing retirement savings and health insurance coverage and providing incentives for certain industries may be better accomplished through direct expenditures rather than through the tax code. Further, she recommends that Congress approach tax reform in a manner similar to zero-based budgeting, an approach also proposed by the National Commission on Fiscal Responsibility and Reform. What a novel idea – dealing with the nation’s public policy objectives in an open and transparent way, which ultimately empowers the voters, while improving the ability of individuals and businesses to make sound economic decisions.
In addition to complexity and fairness concerns, drivers of fundamental tax reform include the temporary nature of the recent agreement to extend all the Bush tax cuts and the 2009 estate tax structure, the ever-increasing reach of the AMT, dozens of expiring tax provisions (many that are now on year-to-year life support), the $350 billion tax gap, and competitive issues for our multinational corporations created by the Code’s approach to taxing worldwide income, which in turn drives these corporations to look for less taxing locations for investment in property, plant, equipment, and people.

Impact of Tax Reform on CPAs

Have no fear of fundamental tax reform. The Tax Reform Act of 1986 was the last time Washington actually enacted significant tax reform, and that ushered in a golden age for tax professionals. Businesses still have to measure income. The government’s need for revenue is increasing exponentially as boomers begin retiring, the new health care laws are phased in, and we look for a more sustainable fiscal path forward. Trust me, there is no easy way to raise $2.6 trillion a year through taxes ($3.8 trillion if you include federal expenditures financed by debt). CPAs will continue to play a vital role in the area of tax planning, compliance, and administration for many years to come.
Future installments in this series will explore political and policy considerations and the various tax reform alternatives that will be considered in the coming tax reform debate.

Welcome to 2011 – A Glass Half Full

Apparently, gloom and doom sells. In the era of the 24-hour news cycle and media competition measured by eyeballs and page views, pessimism can become a self-fulfilling prophesy. If we let the daily newsfeeds determine our fate, individuals will not be opening their pocketbooks anytime soon, businesses will neither be investing nor hiring, and governments will forever be mired in a continuous state of gridlock. Maybe, however, that’s all just a glass-half-empty view of the world. If true, perhaps there’s a glass-half-full worldview as well.

Spurring Business Investment
To begin with, American corporations’ balance sheets are strong by historical standards, with approximately $2 trillion of cash sitting on the sidelines, the highest share of total assets since 1963, according to The Wall Street Journal. The conventional wisdom is once business leaders develop a greater sense of certainty about the tax and regulatory environment, all that cash will be deployed into capital projects, hiring more workers, and other investments. And once that happens, buckle your seat belt.
Proposals are on the table that could jumpstart the process. John Chambers, Chairman and CEO of Cisco Systems, and Safra Catz, President of Oracle Corporation, suggested in a recent WSJ op-ed a straightforward tax law change that would allow U.S. multinationals, which collectively account for approximately $1 trillion in retained earnings from their overseas operations, to repatriate these foreign earnings back into the U.S. at a relatively low tax rate of 5%. Today these companies are building plants, making acquisitions, hiring workers, and purchasing equipment abroad because they would have to incur a 35% federal tax hit (plus state taxes) if they repatriated the earnings back into the U.S. This stands in contrast to almost all developed countries that allow companies to repatriate earnings at 0%-2%. The effect would not only be the creation of a privately funded domestic stimulus of up to $1 trillion, but also another $50 billion of tax revenue the IRS wouldn’t otherwise receive. The private stimulus theoretically would be invested by these businesses in domestic hiring, capital expenditures, and research and development. And the additional tax revenue could be devoted exclusively to hiring and small business lending incentives, if Congress so desired.

Household Balance Sheets
In addition to strong corporate balance sheets, households, which account for 70% of GDP, have been rebuilding their balance sheets as well. Not only have the equity markets rebounded significantly from the depths of the recession, households have been deleveraging over the past few years, with debts and debt payments as a percentage of household income falling to more sustainable levels. Further, the nation’s savings rate is near six percent, up from almost zero just a few years ago. Collectively these trends indicate that American consumers are in a much stronger position to support a sustainable recovery than might have been the case after previous recessions, although no one expects a return to the spending spree of the bubble years.

The Three Waves
A third leading indicator of better times to come can be gleaned from connecting several recent datapoints. Hiring tends to follow a predictable cycle following an economic contraction. First, businesses and other organizations cut costs, including payroll, then try to wring as much increased productivity out of remaining workers as possible. When productivity increases wane, temporary hiring (contractors, freelancers) picks up, and finally, when business leaders see enough evidence of a sustained increase in demand for their products and services, they resume hiring. Of course everyone is aware of the layoffs and cost cutting that began in January 2008 in much of the U.S. and in September 2009 in Texas. What we’ve seen lately is a sharp decline in worker productivity increases, from a 6.3% annual clip in Q1, 2010 to 2.5% in Q3 according to the DOL, indicating that businesses have achieved about all the efficiencies they can expect from increasing productivity of existing workers. In addition, the Federal Reserve’s Beige Book, a qualitative survey of business conditions across the country, indicated a pickup in temporary hiring in the fall of 2010. And forward-looking firms in the accounting industry have begun looking beyond productivity and temporary hiring and are entering the third phase, actually increasing headcount. Deloitte indicated it plans to increase staff by 50,000 a year globally for the next five years, from a base of 170,000 employees; Ernst and Young expects to hire 38,000 new employees for its year ending June 30, 2011; a CPA Trendlines survey of local and regional firms in the U.S. indicated 37% of accounting firms planned to add headcount in 2011; and finally, the Bureau of Labor Statistics forecasts 280,000 new accounting jobs this decade, a 22% increase. Sounds like a reason to be bullish on the accounting profession.
The picture is especially encouraging with a Texas-centric view. According to the Comptroller’s website, job creation in Texas exceeded 28% of all U.S. job creation in the first seven months of 2010 more than three times the national average. And a report by the Real Estate Center at Texas A&M indicated that Texas produced over half the jobs in the U.S. for the year ended September 2010. A number of contributing factors - less unionization, a lower minimum wage, a lower tax structure, the smaller impact of the housing bubble, the industrial mix, and Texas’ geographic advantages – undoubtedly contributed to this very positive trend we need to ensure continues.

A Growth Agenda
As President Obama once said, “Elections have consequences.” Hopefully the consequences of the November 2010 elections will include a more pro-growth policy agenda at both the federal and state levels. There is no shortage of pro-growth proposals on the table. Surely most policy-makers realize by now that businesses and individuals have been stuck in a state of inertia for some time, unable to predict what their taxes will be, what their healthcare costs will be, and what their regulatory burdens will be, and that eliminating uncertainty will have a positive economic impact. And while a natural tension exists between one side that prefers a big infrastructure program, focused subsidies, and tax credits for key industries, and the other side that wants to end subsidies and tax credits and adopt a simplified tax system, each believes its policies will drive economic growth. Given that, it should be possible to put economic growth and job creation on the front burner and coalesce around that. (I know, but this is a glass-half full article!)

A Sustainable Texas Budget
According to the Texas Public Policy Foundation, a conservative Austin think tank, the state’s total appropriations were $92.7 billion in 2010, up from $23.3 billion in 1990, an increase of almost 300% over the 20-year period. During that time, the state’s population has grown 49%, and inflation has increased 66.4%, or a combined 115%. While the 2011 Legislature can’t reverse the growth in spending over the last 20 years, it can put Texas on a sustainable path going forward. If spending growth had been limited to the combined population plus inflation growth over the past 20 years, Texas would have spent only $50.2 billion in 2010, $42.5 billion less than the $92.7 billion, and we wouldn’t have to worry about $20+ billion shortfalls and sales tax on professional services. Of course, hindsight is 20-20, and most observers realize that to be sustainable to the point where we’re not in a fiscal crisis during every legislative session, the Legislature will have to structurally address the growth of state government spending. The Texas Public Policy Foundation favors a strong tax and expenditure limit tied to population plus inflation growth, or the growth in personal income if less, to prevent future budget short¬falls. It would require a supermajority vote of each chamber to ex¬ceed the limit rather than just a simple majority vote, and would expand the scope to include all levels of government within Texas. I personally don’t know if this is the best solution for Texas or even realistic, but I salute the Foundation for throwing a stake in the ground and initiating the debate. Hopefully the Legislature will take a cue and look beyond balancing the current budget and put Texas on a fiscally sustainable path going forward.

Conclusion
Is the glass half empty or half full? A case can be made for better times ahead and interesting suggestions are emerging. Many businesses are flush with cash and are looking to Congress to eliminate barriers that prevent investment and hiring in the U.S. Improving household balance sheets should result in a more confident consumer sector. Both companies and households are waiting for clarity in the tax and regulatory environment and hope the November 2010 election results will be the catalyst that moves Congress beyond its current state of gridlock. Certain trends suggest businesses are beginning to move into a robust hiring environment, especially in Texas and especially for CPAs. Finally, as we approach the 2011 Texas legislative session, we can hope that lawmakers can not only figure out how to balance the current budget but also agree on a more sustainable fiscal framework going forward.
That’s the half-full view. Happy New Year!

Effective Communication in the 21st Century

Somebody once said that all business problems are communication problems. And of course, we all learned in junior high the three essential elements of communication are the sender, the receiver, and the message. Therefore doesn’t it follow that if you could master the three elements, you’d be a great communicator and hence, a great problem solver? That was probably the case for many years, but the era of constant change and evolution known as the 21st Century has introduced new elements into the equation. Effective communication in 21st Century will require an understanding of demographic and cultural differences among people as well as differences among the platforms through which they go to share information and connect with others.

Senders and Receivers

Many CPAs trained in the soft skills will recognize the Myers Briggs Personality Type Indicator as a foundational tool of effective communication. While the initial view of one’s personality type will certainly be interesting if not revealing, Myers Briggs’ best use is as a framework for understanding individual differences with others so that your communication can be tailored effectively. When you – the sender - understand your own personality type and how it differs from other firm members, clients, referral sources, revenue agents, and other members of your ecosystem, you can better understand the context in which others – the receivers – interpret your message, e.g., how clients best like to learn about services you provide and how they like to interact during the process of gathering information and making decisions.

Demographic Differences

With today’s workplace consisting of at least three generations, effective communicators will recognize the generational differences and their root causes and adapt their communication styles accordingly.
Baby Boomers came of age in the post-WWII era in a period of optimism, opportunity, and prosperity. They value loyalty and respect the organizational hierarchy. They recognize that people are living longer and understand the ugly mathematics of retirement; accordingly, we may not see Boomers retire in droves as they reach traditional retirement age, as many have suggested.
In contrast, Gen Xrs’ attitudes were shaped by recessions, Asian competition, downsizing, and the emergence of the personal computer. In the workplace, they are independent and like to take charge. Many are undoubtedly frustrated by the grey ceiling created by the Boomers’ delayed retirement.
Millennials’ opinions about business were shaped by the dot-com meltdown, 9-11, Enron, Andersen, Lehman Brothers, globalization, and layoffs. As a result they tend to put life before work, a foreign concept to many old-school CPAs. They are generally fast learners and highly motivated but change jobs more frequently than older generations. They want the ability to work from home and work flexible hours and are more likely to start their own businesses. They need continuous feedback, and an H.R. system based on an annual performance review is insufficient for their needs. They even view job security differently. A recent study at MIT showed that Millennials were less engaged during the recession than Baby Boomers, while Boomers didn’t seem to have disengaged at all, having seen the booms and busts of economic cycles before.

The difference in organizations today is that we often see 60-somethings working alongside 40-somethings and 20-somethings, each bringing different attitudes about authority, loyalty, formality, and the organizational structure. While this generational diversity can cause stress and conflict due to differing perspectives and values, it can also be the foundation for creative and innovative problem solving where the whole exceeds the sum of the parts.

Cultural Issues

In our global economy, it’s increasingly important to understand cultural differences among people. Whether scheduling appointments, entertaining clients, or closing the deal, the way you greet people, gesture, dress, and even receive gifts can influence the outcome. Some cultures are relationship based, so ample time is devoted to developing the right relationship as a precursor to doing business. Others place a higher value on rules and contracts rather than relationships. Some cultures value status, family background, the universities attended, and job title, while others are meritocracies and far less formal. Some cultures communicate in a very direct way, without ambiguity, while others more indirectly via body language, facial expression, and other non-verbal ways. A best-selling business book titled Kiss, Bow, or Shake Hands, cites the following examples:

Australia: The "thumbs-up" sign, which in the U.S. indicates "OK" is considered rude.

China: Avoid making exaggerated gestures or using dramatic facial expressions. The Chinese do not generally use their hands when speaking, and become distracted by a speaker who does.

Indonesia: Since it is impolite to disagree with someone, Indonesians rarely say "no"...a clear way to indicate "no" is to suck in air through the teeth.

Managing the Platform

…Which brings us to the platform --- the place where we go to share information and connect with others. In a relatively short period of time we’ve seen platform shifts from the traditional land line to cell phones to smart phones, from snail mail to overnight mail to faxing to email to instant messaging to texting, from desktops to laptops to tablets, from television to U-Tube, from bulletin boards to online forums, and from glossy brochures to websites to social media sites. And no doubt about it, there are platform preferences unique to the different generations and different cultures represented in the workplace. For example, a recent Pew Research Center survey showed that 90 percent of Millennials use text messaging, compared to just 11 percent of Boomers. People I know talk about how hard it is to communicate with young people. The real problem is they don’t understand the platforms the young people prefer. Effective communicators must be skilled at understanding the various platforms and how different people from different generations and different cultures prefer to be communicated with.

Conclusion

The key elements of effective communication will always be the sender, the receiver, and the message, as we learned long ago. What’s new in the 21st Century is that mastering the three elements has gotten much, much more challenging.

The Morphing Tax Ecosystem

Ec-o-sys-tem: a system formed by the interaction of a community of organisms with their environment, functioning as a unit, all the parts working together to make a balanced system; every species has a niche in its ecosystem that helps keep the system healthy.

It’s interesting to think about the CPA’s role within the tax ecosystem, consisting of the President, Congress, Treasury, the Internal Revenue Service, taxpayers, and the tax advisors and preparers, information and software providers, other federal, state, and international agencies, each with their own roles to ensure the appropriate amount of tax is reported and collected. As with any ecosystem, the various elements of the tax ecosystem morph and change over time, and of particular interest is how this morphing of the tax ecosystem will cause changes in the roles and responsibilities of the various members of the system.

Follow the Money

To fully grasp the concept of the tax ecosystem, let’s begin with the federal budget. President Obama submitted a $12.63 billion budget for the IRS for FY 2011, up four percent from 2010. A four percent increase initially seems like a lot. However, in light of all the Service is being asked to do these days, is it enough? According to the IRS Oversight Board, created by Congress to review and approve the IRS-prepared annual budget request, yes and no. The Board, whose report is submitted to Congress along with the President’s request, believes the amount allocated by the President for enforcement is about right, while the amount needed for taxpayer service and operations (IT) support is insufficient. Consider the following trends:

• Spending for taxpayer service has been declining in recent years, with inflation adjusted funding down 6.8% since 2004. As a result, the Service answered only 53% of its calls in FY 2008, down from 87% in 2004. And while service levels are improving, the goal is only 71% for the current year.

• Regarding enforcement, examination coverage has been on the downswing for both individuals and corporations. A recent academic study from Syracuse University concluded that the IRS audited 22% fewer large companies in 2009 than in 2005 while increasing audit coverage of smaller companies, despite the fact that the ROI per hour worked is about nine times greater for audits of large companies than small-to-medium companies.

• With regard to collection practices, National Taxpayer Advocate Nina Olsen recently reported that since FY 1999, the IRS has increased lien filings by 475% and levies by about 600%, yet inflation-adjusted revenue raised by the IRS Collection function has actually declined by about 7% over that period.

The Core Mission

While 86% of taxes are collected voluntarily, i.e., without the IRS’s direct involvement, there exists a well-publicized tax gap, defined by Treasury as the aggregate amount of true tax liability that is not paid voluntarily and timely. For the past decade the tax gap has been thought to be in the $300 billion to $350 billion range. Key new initiatives to close the tax gap include:

Return Preparer Scrutiny.

According to Taxpayer Advocate Olsen, about 58% of individual taxpayers and 80% of small business taxpayers hire return preparers to complete their returns. The IRS recently completed a program called the Return Preparer Review, an assessment of the return preparer community, including both licensed preparers and unlicensed preparers, finding “extremely high rates of error and misconduct among preparers.” Characterized as an “educational” program, at times using undercover agents posing as taxpayers and in other situations using teams that included members of the Criminal Investigation Division, the initiative succeeded in highlighteding the level of unethical and unqualified return preparers in the overall tax ecosystem. As a result of the study, allpaid return preparers will also be subject to the Rules of Practice Before the IRS (Circular 230). This means that when the Service suspends or disbars someone, he or she will no longer be able to prepare federal tax returns, which previously wasn’t the case. The Service used a July 6 news release to remind return preparers of their due diligence responsibilities under Circular 230, describing the disbarment of a CPA for failing to determineinvestigate the correctness of entries on the tax returns of a corporation and its shareholders when the income reported was inconsistent with the taxpayers’ lifestyles. We can expect ongoing debate about what constitutes due diligence.

Globalization of Tax Administration

In a global business context the Service’s objective is to ensure that taxpayers don’t use the international capital markets and tax code complexities to push tax planning beyond acceptable limits. To that end, the IRS is working on developing a protocol for joint country audits of multinational corporations. For individual taxpayers, the focus is to ensure U.S. taxpayers with overseas assets pay what they owe, supported by provisions of the HIRE Act, which tightened the rules and increased the penalties on undisclosed foreign investment accounts. In addition, the IRS is opening Criminal Investigation offices in Beijing, Panama City, and Sydney, in addition to existing offices in Hong Kong and Barbados. On top of that, the Service has recently formed a new group called the Global High Wealth Industry Group that will focus on high-wealth individuals and their related entities, including trusts, real estate, foundations, corporations, partnerships, retirement plans, and other entities, wherever located. Other developed nations including Japan, Germany, the UK, Canada and Australia are setting up similar programs, and an increased level of cooperation and information sharing among tax agencies is in the plans.

Expanded Information Reporting

Most people think of Forms W-2 and 1099 when they think of information reporting. Commissioner Shulman takes a much broader view. Pointing to its current practice of issuing a large number of information document requests and spending a significant amount of time “rooting around for information,” Shulman believes taxpayers should be more transparent and forthcoming, so that the IRS and taxpayers spend their time more productively. Leveraging its recent Supreme Court victory in Textron and the FIN 48 requirement for disclosure of uncertain tax positions, the Service has issued a draft Form 1120 UTP that would require the reporting of a C corporation’s federal income tax positions for which the corporation or a related party has recorded a reserve in an audited financial statement. “It’s part of the broader theme of information reporting and having a transparent system,” said Shulman. Not surprisingly, the TSCPA, AICPA, ABA, and TEI all issued strong commentsobjections objecting to implementation of the new disclosure requirements as originally conceived. While the future of Form 1120 UTP has yet to play itself out, there are a number of enhanced informational reporting initiatives that, together with the new return preparer rules, could be transformational with respect to tax administration. These initiatives include reporting:

• Cost basis of securities;
• Debit/credit card payments to merchants;
• Payments to corporations by businesses;
• Information exchanges with foreign tax treaty partners;
• Foreign investment accounts; and
• Value of employer provided health-care benefits and whether they comply with coverage requirements.

For the IRS, it will mean a continuation of the trend toward more correspondence audits, which today comprise 77% of all federal tax audits. It will not be a panacea however. Information reporting won’t cover cash payments detect unreported cash payments or illegal activities; it probably will hit low and middle income taxpayers more severely than higher income taxpayers; and it won’t curtail fraud and abusive schemes resulting from refundable credits (e.g., EITC) because of the way these programs are designed by Congress.

Improving Information Technology

While the IRS Oversight Board concluded the Service’s IT infrastructure badly needs upgrading, there is one development on the horizon that, although a few years away, will enable the Service to take a quantum leap forward, once implemented – extensible business reporting language, or XBRL, which will involve the tagging of tax return data submitted by business taxpayers. While currently in the planning stages at the IRS, the SEC has begun requiring financial statements be submitted in XBRL format; other countries, most notably the UK, have already set the XBRL wheels in motion for tax reporting. Once the IRS requires businesses to file their returns tagged with XBRL, the IRS will have the ability to slice and dice taxpayer data in new and inventive ways, comparing companies’ data against benchmarks to identify anomalous entries and select cases for investigation much more efficiently. This may result in more cases being investigated, or in better identification of cases to investigate, but in any event it will allow the IRS to better enforce compliance with tax laws, as there will be less need for judgment and guesswork on the part of IRS examiners.

Expanding Roles and Responsibilities

Thanks to Congress, the IRS is being pulled in multiple directions as its responsibilities have grown exponentially over the last few years. While the agency has historically focused on taxpayer service and enforcement, Congress has directed it to administer a number of social-services programs, which means it now redistributes through credits and other mechanisms an increasing portion of the money it collects, for programs like the Earned Income Tax Credit, Economic Stimulus Payments, Making Work Pay Credit, First-Time Homebuyer Credit, the expanded COBRA provisions, and now the new health care system. As the new health care law is implemented, the IRS is charged with verifying whether taxpayers are carrying the required level of insurance, collecting fees if they are not, collecting taxes on high-value plans, and determining household income. The Congressional Budget Office estimated that it will cost the IRS $5 billion to $10 billion over 10 years to administer the new health care law.

Accordingly, some have expressed concern that the Service’s budget is not keeping up, and Congress has not provided sufficient funding. Commissioner Shulman proudly told the Journal of Accountancy that the IRS is now seen as the “go-to agency in government” because of its ability to execute quickly. Taxpayer Advocate Olsen, while suggesting the IRS is indeed capable of delivering the social programs, expressed concern that the Service is neither structured nor funded to absorb the additional responsibilities effectively. She suggests the IRS’ mission statement and strategic plan be revised to explicitly acknowledge its new hybrid role as part tax collector and part benefits administrator. This may be necessary to obtain sufficient funding for the Service to perform both roles effectively. Indeed, one has to wonder….is a 4% increase enough when service levels are down, audit coverage is down, collection practices are ineffective, systems upgrades are needed, and now the Service is being forced to expand its mission?

Conclusion

As we’ve seen, the IRS’ responsibilities are growing exponentially while its budget is increasing far more modestly. Certain parts of its operations appear to be underfunded while the agency is being called on to administer more and more social programs, most notably the new health care laws. The IRS is responding to its challenges with a global approach to tax administration, by promulgating new taxpayer self reporting requirements, by weeding out bad return preparers, and by automating as much as possible.

What will be the impact of this morphing tax ecosystem on CPAs? Is the IRS in effect deputizing the return preparer community? What will be the impact of return preparer registration on CPA tax practice? What will the CPA’s role be in administering nationalized health care and other social programs? How will the CPA’s role within the tax ecosystem change once XBRL, coordinated international audits, and disclosure of uncertain tax positions are all implemented? We can all speculate, but one thing is certain: the tax ecosystem is evolving, and new opportunities to serve our clients and employers will emerge as a result.

Changing Your Mind: Thin Slicing for CPAs

While preparing for a recent presentation on current tax and accounting developments, I was almost overwhelmed by the sheer volume of regulatory change that has occurred in the past year. It’s easy to see why survey after survey shows one of the primary pain points for CPAs is keeping up with all the information one has to read, process, and retain, regardless of the area of practice. No matter whether your roots lay in generally accepted accounting principles or in the federal tax code, the volume of changing regulation and the velocity in which it’s coming these days can be overwhelming for seasoned professionals and staff accountants alike. Nevertheless, our clients and employers expect us to be on top of everything, have an answer for every question, and we naturally want to meet or exceed expectations.

Indeed, the quantity of information that’s readily available to us, whether via the free web or trusted subscription service, along with the technology that enables us to find and retrieve it, is changing the way we consume information, the way we learn, the way we make decisions, and indeed, the way we work.

I first noticed this trend at home, watching my kids and the way they studied. My son, who graduated from high school in 2001, approached his research papers in the traditional way, much as I had, spending hours in libraries, combing through volumes of encyclopedias, books, and journals. My daughter, on the other hand, graduated in 2007, became visibly frustrated if she didn’t locate a source directly on point within a few minutes on Google. Both were good students, made good grades, and did well in college. Nevertheless, I couldn’t help but wonder whether my daughter was developing the deep knowledge that comes from methodical and lengthy study. I have the same concern about today’s young CPAs. I feel like I developed a pretty good “accounting knack” and fairly deep understanding of tax law, but I’ve been at it for over 30 years. How do we make sure the younger generation develops that same deep knowledge of accounting standards and tax law? The sentiment was echoed recently by a senior tax partner at a firm in Chicago who told me this when asked about the biggest challenges and concerns in his practice:
One of my main frustrations with young staff is that they rely too much on technology. I often say Google is not the answer to everything. It might be that there is no Googlable answer, which is when analysis and critical thinking take over and provide value and thus justify higher billing rates or at least some value billing.

In 2008, a cover story in The Atlantic titled “Is Google Making Us Stupid?” suggested that technology has changed the way we think. Motivated by a desire not to miss anything, we seek efficiency, convenience, and immediacy, but with scattered attention and diffused concentration as a result. We’ve become power browsers, skimming one source after another, keeping tabs on numerous bits of unrelated information without completely concentrating on anything. It makes me wonder how much of what we read we really retain or learn. A former executive at Apple and Microsoft, Linda Stone, coined the phrase continuous partial attention to describe this state. Call it CPA for short. And it plays right into the Google business model, which calls for driving users from site to site, collecting information about them as they go that can be sold to advertisers. Thus it’s in their best interest to drive us to distraction; the last thing they want is for slow, concentrated reading and deep thought.

The desire to ensure we don’t miss anything can actually impair sound decision making. At first this may seem counter-intuitive, since we’ve been trained since childhood to carefully evaluate all available and relevant information (e.g., haste makes waste, look before you leap, stop, look, and listen). However, it has not only created a state of continuous partial attention, or a lack of focus, but it drives us to gather as much information as possible before reaching a conclusion or making a decision, often creating a sense of information overload, leading to analysis paralysis. This very phenomenon is the subject of Malcolm Gladwell’s best-selling book Blink. Gladwell points out that the additional volume of information may reinforce our judgment but doesn’t make it more accurate. Better judgments, according to Gladwell, can be drawn from simplicity and frugality of information, whereas too much data can distract decision makers and leave them in a state of continuous partial attention.

In Blink, Gladwell uses stories of physicians, policemen, gamblers, and military war games to illustrate the use of what he calls “thin slicing,” the art of using a relatively small number of key variables or bits of data to reach sound decisions. One story in particular provides some interesting parallels for CPAs.
A cardiologist named Lee Goldman developed an algorithm that formed the basis of a decision tree application that enabled physicians at the Cook County Hospital emergency room in Chicago to focus on a just a few critical pieces of information about patients suffering from chest pain--like blood pressure and the ECG, while ignoring other data such as the patient's age and weight and medical history. For two years, data were collected comparing patient outcomes using the decision tree with traditional methods of evaluation. In the end, Goldman's decision tree proved far superior to the traditional approaches. The success rate of the traditional approaches ranged between 75 and 89 percent, while the decision tool produced an accurate diagnosis more than 95 percent of the time. The decision tree application didn’t do the work alone. Rather, it provided the structure that enabled the physicians to focus their expertise on only the most important variables, avoiding extraneous information, input overload and analysis paralysis to reach an accurate diagnosis.

After reading Blink, I became intrigued with the concept of thin slicing for CPAs. (No doubt I felt the pain of information overload personally.) Wouldn’t it be awesome if we could easily separate the relevant from the irrelevant and instantly focus on the key elements that produce a decision or a conclusion on a tax or accounting issue? Avoid information overload and analysis paralysis?
Somewhat serendipitously, I began noticing a wide variety of decision support tools, document assembly applications, mind-mapping software, and business intelligence tools employed by a wide range of professionals, including attorneys, mediators, engineers, economists, physicians, and pharmaceutical companies. These tools generally provide a systematic methodology and framework for understanding a problem, identifying and evaluating options, and reaching a decision, forming a conclusion, creating a document, customizing a workflow, or making complex calculations. Like with Dr. Goldman, the tools don’t replace judgment and professional intuition, they force the user to focus on the relevant variables at the right moment and in the right order, supported by the underlying laws and standards.

In the not-too-distant future, the convergence of information and software will make thin slicing for CPAs a reality. We’ll see ‘intelligent’ applications that feel like software, perhaps with wizard-based user interfaces, driven by the underlying tax and accounting rules. We’ll be able to drill down into a tax topic or accounting standard within a framework that easily separates the relevant from the irrelevant and enables us to focus on the key elements, avoiding information overload and analysis paralysis. Thin slicing for CPAs. You heard it here first.

Looking Beyond the Numbers

Conscious Capitalism

As the country crawls out of the recession, we find ourselves in a “new normal,” in which business leaders are beginning to embrace what author Patricia Aburdene of the Megatrends series calls “conscious capitalism,” where business and investment decisions are guided not completely by an absolute quest for profit at all cost, but profit-balanced to a degree by non-financial drivers including social consciousness, compassion, environmental responsibility, and contribution to the greater good. This paradigm shift in the way companies do business has been caused by a number of factors, including consumer demand for more sustainable products, increased influence of personal social missions on corporate governance, and a growing recognition that sustainable business practices can lead to lower costs and higher profits.

We’ve seen this trend take root with Bill Gates’ and Warren Buffet’s war on world hunger via the Gates Foundation, with the sustainability movement; with the One Laptop Per Child initiative; and the emergence of micro-financing techniques to fund business activities in developing countries that traditionally lack access to banking and related services, in hopes that such access will help people out of poverty. A key theme at this year’s World Economic Forum in Davos, Switzerland was the integration of sustainability issues with business decision making and the need for corporations to deliver wealth creation and economic returns in a more sustainable, responsible way.

A number of high-profile companies are moving beyond marginal social responsibility initiatives that are for the most part internally focused and adjunct to core business activities. A recent Wall Street Journal conference on business and the environment featured Robert Iger, CEO of Disney, which openly aspires to be the world’s most admired company. Iger requires each of his business units to report quarterly and publicly on their impact on the environment – how much waste they create, energy they use, water they consume, etc. In addition, every Disney capital request must include an environmental component, detailing the impact on the environment that the project is projected to have. And perhaps most interesting, the company levies a tax on each business unit based on their anticipated environmental impact over the next five years as a mechanism for funding conservation projects around the world.

We’ve also seen the emergence of new companies like Whole Foods and Seventh Generation, which build their organizations around a defined social mission. On the finance side, there have been socially responsible mutual funds around for a while now, the Calvert Funds being a large and well-known example, but the socially-responsible and mission-driven investing framework has started to expand to the private equity and venture capital worlds as well. The trend has become pervasive enough to support a host of research and advocacy organizations such as the Social Venture Network and the Sustainable Business Network that lead in development of best practices and entrepreneur connectivity. One of the best-known venture funds, Kleiner, Perkins, Caufield & Byers, has said that sustainability represents one of the biggest economic opportunities in history, and has jumped in feet-first. Kleiner Perkins’ John Doerr predicts that new and clean energy is the next great global industry, although he worries we are already far behind the Chinese in terms of investment. Vinod Khosla of Khosla Ventures believes energy storage is a rapidly evolving industry, and Paul Holland of Foundation Capital talks about a smart grid and energy web. In essence, what these venture capitalists are all saying is that they expect companies that practice conscious capitalism to outperform the market to a significant degree.

Why It Matters to CPAs

Skeptics may point to what has become known as “Climategate,” the deliberate attempt by certain scientists to distort research findings to support their dire global warming scenarios, and the failed attempt last year in Copenhagen to reach a global consensus on a path forward regarding climate change, as evidence the sustainability movement is a passing fad. CPAs, however, have been dealing with environmental issues professionally for many years, and it looks like things are just heating up (no pun intended). Existing accounting standards have come under fire, the SEC recently jumped into the picture with new climate change disclosure guidelines, and the convergence of U.S. GAAP and IFRS may bring the issue to the forefront in the next year or two. Further, the concept of sustainability reporting is being touted as a new practice area by the AICPA, and Big Four firms appear to be building robust new consulting practices helping companies assess and manage environmental risks (including those arising via M&A activities), develop sustainability benchmarking, apply performance metrics and reporting, and estimate remediation liabilities. And noteworthy to this discussion is a 2008 study listing climate change as the number one risk facing the insurance industry, according to a recent SEC release.

U.S. GAAP currently provides accounting guidance for environmental liabilities. Under FASB ASC 450-20 (formerly SFAS 5), when it’s probable that a loss has been incurred (e.g., via litigation or regulatory assessment) and the amount can be reasonably estimated, the liability should be accrued. FASB ASC 410-20 (formerly AICPA SOP 96-1) provides further instruction and clarification on determining probability and the reasonably estimated amount of environmental remediation costs. While GAAP was designed to prevent companies from managing earnings via recording contingent liabilities when the liabilities were not probable and estimable, there is a sense that current standards allow them to lowball their estimates by selecting the low end of the range of estimated cleanup costs. The issue is exacerbated by the attorney-client privilege, which to some extent shelters contingent environmental liabilities from disclosure. We can probably expect a refinement of our professional standards at some point, perhaps moving more along the lines of IFRS 37, which is a bit more stringent than U.S. GAAP, requiring companies to use the midpoint of the probable range of estimated cleanup costs. In any event, with the sustainability movement gaining traction, we will likely see an expanded focus on reporting environmental liabilities that will keep the issue on the front burner in the corner office, in legal and regulatory circles, and among auditing firms for the foreseeable future.

The focus on emissions reporting was recently elevated by an SEC release providing interpretive guidance to help registrants meet their disclosure obligations concerning the effects of climate change on their businesses. While the timing and scope of federal legislation is uncertain, the release points out that state and local governments have enacted legislation and regulation of greenhouse gas omissions, the EPA effective this year is requiring reporting of such emissions, and many U.S. businesses conduct operations internationally where they are subject to Kyoto Protocol standards. Accordingly, the SEC believes these accords can have a material impact on U.S. companies, their supply chains, distribution chains, personnel, and physical assets, prompting it to take a fresh look at disclosure requirements. In a nutshell, its Regulation S-K requires disclosure related to climate change in the Description of the Business, Legal Proceedings, Risk Factors, and in Management’s Discussion and Analysis. The Commission plans a public roundtable on disclosure related to climate change later this year.

Sustainability Reporting

The concept of environmental reporting has been around at least since the 1980s, with an emphasis on whether resources would be sufficient for future growth. By the late 1990s, the concept of the triple bottom line – reporting on environmental performance and social performance to supplement economic performance – had emerged and has since morphed into a concept called sustainability reporting, which includes a wide variety of metrics an organization can use to report on its economic, environmental, and social performance and its impact on the community. Environmental measures focus on reducing resource use, reducing waste and emissions, and recycling outputs. Social measures include growth and development opportunities for employees, contributing back to the community, and improving practices with external stakeholders. Companies are drawn to the concept for a variety of reasons, from risk management to brand and reputation building.

The European Union has embraced the concept of sustainability reporting and the UK Accounting Standards Board has issued a best practice guideline. A number of countries, including Japan, Australia, France, Spain, South Africa now require reporting of some sustainability elements, and by 2007, most large organizations in developed countries were producing some sort of report on social and environmental performance, although Europe seems to be ahead of the U.S. in terms of all three elements of the triple bottom line concept, according to an analysis published by Australian professor Graham Hubbard. Further, although 80% of the largest companies worldwide are issuing reports on sustainability, only 4% have integrated it into their annual reports, explaining how sustainability is connected to the overall operational strategy of the business, according to a 2008 KPMG study.

There are several issues that must be overcome before sustainability reporting becomes mainstream practice, as the current state of reporting is ambiguous and confusing due to the lack of a generally accepted global reporting framework, the lack of uniform definitions, inconsistent applications, and the lack of attestation standards in most countries. While multiple frameworks have been suggested, one will have to emerge as the standard for sustainability reporting, much like GAAP is for financial reporting and COSO is for internal control evaluation. Currently, the most widely used framework for providing guidance for disclosure about sustainability performance is called the Global Reporting Initiative (GRI), based on U.N. principles and used by three-quarters of the Global Fortune 250, according to the International Federation of Accountants (IFAC). The GRI, which itself is a stakeholder organization with participants from business, labor, and professional institutions worldwide, is pushing for development of XBRL taxonomies for non-financial information, which could drive further adoption of its sustainability framework in the U.S., given the SEC’s rule requiring all registrants to submit financial statements in XBRL. An alternative sustainability framework was proposed in 2009 by IFAC (http://web.ifac.org/sustainability-framework/splash), specifically to support professional accountants and their organizations integrate sustainable practices in their business processes.

Opportunities for CPAs

Today, sustainability reporting and assurance are not core competencies of CPAs in the U.S. However, proponents of sustainability reporting claim that governmental, regulatory, and audit oversight of sustainability issues will become the norm within the not-too-distant future, across all industries and around the world. Recognizing this trend, and potentially the risk of inaction, the AICPA has begun an awareness campaign, enlisting the help of none other than Prince Charles, the Prince of Wales, to deliver an inspiring presentation at its fall Council meeting, imploring “the U.S. CPA profession to take a leading role in helping develop the tools and information necessary for companies to embed sustainability issues effectively in their day-to-day operations and decision-making and to report sustainability performance in a more clear, concise and connected way.”

Some CPAs, by nature professional skeptics, may dismiss anything green-related as anti-business and may view the AICPA’s attempt to elevate awareness in sustainability reporting as another WebTrust initiative. Indeed, the AICPA may sense that the U.S. is behind in adoption of sustainability reporting and be concerned about IFAC, which sets global auditing standards outside the US, potentially emerging as the global standard-setter. The greater risk as I see it extends beyond who controls standard-setting to the entire global accounting profession, as various other types of organizations, including consulting, engineering, and credentialing organizations may sense the opportunity and take the lead. I’d like to think it’s ours to lose at this point.

As sustainability reporting becomes established, there are a number of ways CPAs can capitalize on the opportunity, which AICPA Chair Robert Harris describes as a new practice area. The following service opportunities for CPA firms have been identified by the AICPA (http://www.aicpa.org/innovation/baas/environ/faq.htm):

• Assurance services (examination, review, or agreed-upon procedures attest engagements) with respect to a sustainability report;
• Assurance services (examination, review, or agreed-upon procedures attest engagements) with respect to the effectiveness of internal control over sustainability reporting;
• Advisory services to develop systems to capture information related to sustainability reporting;
• Advisory services to promote improved dialogue and relationships with employees and communities in which operations are located;
• Certification for environmental management systems under ISO 14001;
• Due diligence services in connection with mergers and acquisitions, which could involve the assumption of environmental liabilities; and
• Benchmarking.

Conclusion

The conscious capitalism phenomenon is affecting CPAs in a number of ways, driving the evolution of professional standards, potentially creating a need for new core competencies, and creating new responsibilities and opportunities. Today, U.S. businesses and CPAs find themselves in an unfamiliar position, lagging the rest of the developed world in what may be a great opportunity to take a leadership role. We’re still on the ground floor but may not be for much longer, as sustainability reporting and attestation services are presently being driven outside the U.S. and not on our timetable. Nevertheless, progressive firms have an opportunity to establish themselves as leaders in this area, enhancing their professional reputation, their world view, and their future growth potential.