Details

Written by: T. Steel Rose, CPA, ACS Editor

Published: 11 January 2017

MaloneBailey audits small SEC companies. With 190 SEC registered clients MaloneBailey is 7th in the world for the number of U.S. public company audit clients. MaloneBailey has grown from 1996 with two SEC reporting clients to now auditing the NASDAQ, NYSE MKT (fka AMEX) and New York Stock Exchange listed companies. Mushrooming up to a $15 million dollar firm, it has settled back down to a $10 million accounting firm. I made the drive to Houston to speak with audit partner Steven Vertucci, CPA and learn about him and this courageous firm.

How did you get into accounting?

I took one of each basic business discipline course in college. I had a great accounting professor, Dr. Margaret Shelton. I was hooked after the first class. I enjoyed the topic but she made the topic interesting and it stuck.

What do you like best about being a CPA?

We never stop learning. The accounting field continually adapts to changes in business and the economy. CPAs are constantly gaining education to keep up with change. This keeps what we do fresh and offers ongoing challenges which I enjoy. Additionally, when you specialize in an area as I do with audits of publicly traded companies, you are truly offered an opportunity to be a thought leader. The CPA designation is the gateway to that opportunity and many others.

How did MaloneBailey change the way audits are conducted for small public companies?

We embraced the idea of the remote approach to auditing. This allowed us to operate outside of our local area and by doing this we were not only exposed to companies but also to other professionals that serve those companies regardless of where the company was located. Our network of professionals we work with grew exponentially since they themselves were generally located somewhere other than our local market. We also made auditing small publicly traded companies an industry specialization. No other firm was attempting to accumulate the volume of companies we were. Rather than having a traditional practice that might have a few public companies, we made it the centerpiece of our practice. This allowed us to be the first non-national firm to hit the 100 mark for public companies. We did this in 2007 and have stayed above 100 ever since. We currently have around 200 and remain the only non-national firm to audit more than 100 and are one of 10 firms in the world who can say that. See the link https://pcaobus. org/Inspections/Pages/InspectedFirms.aspx.

What changes were made to the standard CPA firm practice model?

We adopted the remote model approach. In early years, we also focused more on building the practice by bringing in partner level candidates to provide more partner time per engagement. In later years we filled out the bottom of the more traditional pyramid but leveraged experienced people as we built the SEC practice.

The larger firms did not want to do these small company audits because they could not get the fees. It was hard to get information from the SEC pre-Internet. John Malone’s first move was to hire a financial reporting manager from Compaq computers to bolster the experience of SEC reporting. When he came over, Malone brought people in at the partner level to specialize in small company public audits. Malone attracted key securities attorneys who had a few public company clients.

Malone could deliver on time and at the right price and get ongoing referrals. Some work came from local CPAs who may not have SEC experience. Malone’s volume created efficiencies by dropping other work and focusing on SEC work. We navigated the rules to get them registered and give them fair fees. Other firms had higher salaries in the northeast and on the west coast. Southern salaries made Malone more cost efficient. We became more workflow efficient and grew sophisticated. We continued to give them the service they expected from the small firm down the street.

Technology helped perform remote auditing. Today we use a Sharefile site like lockbox to drop documents into folders and then we are alerted. High speed scanning helped. The migration to CCHs fx engagement to paperless makes it easier. CaseWare was useful. The documents are updated automatically.

KnowledgeCoach has a battery of questions about the company and tailors the audit programs necessary to prepare the audit. It builds the audit questions to determine the audit steps necessary and determine risk. It has a robust set of analytics when you have a special case. Now the system makes you aware of what you must do. It does simple things like: you must complete and link back to the other portions. After year one, you can become even more efficient.

Some firms cannot do public companies because of professional liability issues. There is greater business risk because the users of public financial statements can be anybody. PCOAB has its own standards. The audit risk is the same; you just have two additional regulatory bodies, the PCOAB and SEC. Every public company requires PCOAB compliance. CPA firms doing over 100 firms get an inspection every year. Reg A, Tier 2 audits can be under GAAS standards.

The PCOAB reviews are rooted in the SAARs. They require three reviews of three quarterly 10Q filings. So it is regularly. The turn-around for the annual audit usually takes until February. The smaller companies do not have the internal control requirements. Year-end for a public company audit is just one part. You have the SEC 10K requirement which requires other people to sign off. The financials and footnotes are a small piece of the filing, less than 50%. The rest of the 10K must be prepared by management after the audit is filed.

How does a CPA firm change to serve smaller SEC companies and reduce costs?

We allowed our volume building to create a platform for developing processes in performing audits of smaller SEC issuers. Our training is and has always been tailored to the SEC. Our people spend 90% of their time doing SEC work so they are very proficient and have a high exposure to issues SEC filers face. They don’t constantly have to research the same topics since we see them so often. These have translated into lower fees since our time is spent efficiently for each project.

How do you provide timely service in this yearend centric environment?

Public companies have deadlines. When 90% of your client base is public companies with generally four deadlines a year, you become accustomed to having and meeting deadlines. The deadline focused nature of our practice has demanded timeliness in what we do. There are consequences for SEC issuers not filing timely which we understand and take their deadlines seriously.

How do you maintain quality audits and SEC filings?

Since we are only one of 10 firms in the world with more than 100 SEC filers and we have such an ultra focus on public company work, our work is highly scrutinized by the PCAOB. We are one of only 10 firms that have an annual inspection while everyone else has triennial inspections. Our volume creates a reality where we are dealing with SEC either directly or indirectly on a very frequent basis. Both PCAOB and the SEC are sophisticated regulators and our regular exposure to them requires we maintain quality in all we do.

When should a CPA firm consider auditing the new Regulation A+ public companies?

Reg. A+ companies are required to have an audit. These audits can be done under GAAS and don’t require PCAOB standards. This opens the door for non-PCAOB audit firms to work on these audits. However, CPA firms that don’t regularly work on SEC issuers should approach Reg A+ companies assuming they may want to eventually go public. If that is the case, those companies are going to want to use those previous audits. If the CPA firm is not interested in auditing public companies they should generally avoid auditing Reg A+ companies. If the offering is successful the firm will need a PCOAB audit and will ask to have the opinion upgraded, and the firm may not feel comfortable to perform, and then the firm has to be re-audited.

Reg. A+ Tier 1 and Tier 2 have been qualified but they have not raised a lot of money especially Tier 1. At least Tier 2 has companies behind it.

What do you see as the potential for the crowdfunded companies made possible as a result of the JOBS Act?

Mainly access to investors that otherwise would have been out of reach. Crowdfunding also offers up a new platform for raising capital that didn’t exist prior to the JOBS Act. The potential is there for these companies; the challenges have been letting the regulatory environment mature so everyone involved knows what’s required.

There are four or five approved portals for Tier 2, Reg A+ raises for qualified investors. There was some resistance from broker/dealers. Not a lot has happened with it; it is still a mystery. There appears to be a problem with the portal determining and validating the status of the investor qualified to raise the money.

How does a CPA firm transition to a 100% paperless approach?

You have to jump in and not look back. Change can be challenging and there are reasons firms can come up with on how paperless is too different or too difficult. It is different and can be challenging but it is widely adopted so many firms have proven it can be done successfully. The best thing we did when we went paperless in 2005 was to not do it in steps. We fought the urge to “try it” and instead made the decision to take the entire practice paperless all at one time. We moved forward and never looked back.

How do you perform remote auditing?

For remote auditing to be most effective, a paperless approach is needed and firms will need to invest heavily in technology to assist them with the transition and execution. You need a culture that focuses on technology and provides the tools to audit from anywhere. It is important to note that remote auditing cannot replace the need to be onsite if facts and circumstances require it. We look at every project with the question of what does the project need and require based on what’s going on with the project. One size and one approach does not fit all companies and situations. Auditing still remains an art. In some cases you don’t have to be onsite, and can be there with less time. We are more efficient at our desks. Everyone has four monitors on their desks and a docking station. We can handle a higher volume of clients, and have no down time and expense to set up at a remote site. We are only working on clients when they are ready. We are not waiting. It limits non-productive time.

We can work from anywhere. Malone embraced the idea, we can audit from anywhere. Some staff have an extension of the office as if they are in the office. It accommodates the accountant. One monitor is all email. Another is dedicated to CCH product. The other one may be the Internet for research. You may have a lead sheet on one screen, the bank reconciliation on another and the trial balance to confirmation, rather than flip from one screen to the other. Gone are the days of printing and redlining the financial statements. You can verify; and as the audit partner you can keep all the tasks open at once. We can abandon printing.

After four monitors there is a diminishing return. The desk will usually accommodate only four. John Malone had a special rack to hold five monitors. All seniors can have three or four monitors at home. What we have learned from the remote approach is the auditors love it, and don’t have to live out of a suitcase and be away from home. It has made it easier to recruit. All the brainpower is here at the office to solve issues and get answers. It’s a great environment to learn from.

What advice would you give new CPAs?

Receiving your CPA license is just the beginning, not the end. While it is an extraordinary accomplishment, it is the first of many milestones and goals in a CPA’s career. Enjoy the moment, and prepare for a career of equally challenging moments. I joined the firm when there was only John Malone, founder, Sterling Bailey, co-founder and a senior auditor. I stayed with the firm because of the direction of the firm. Malone was only auditing a couple public companies at the time. Malone built the firm focused on this approach. In 2011 Malone opened two offices in China to serve public company clients there. George Qin came from Deloitte to be Malone’s practice leader in China and do basically the same thing we do here.

What do you do with your free time?

I enjoy spending time with my family. We enjoy water activities so we’re always looking for something near the water in the summer.

Details

Written by: Robert E. McKenzie, J.D.

Published: 10 January 2017

With the filing season rapidly approaching it is worth reviewing the impact of the six year sustained attack on the IRS budget by Congress. Over the past six years Congress has dramatically reduced the IRS budget. The IRS budget has been reduced by about $12 billion to about $10 billion dollars per year. In 2011 the IRS budget was frozen and its workforce shrank. In 2012, 2013, 2014 2015 and 2016 Congress shortsightedly cut the IRS budget and its workforce has shrunk dramatically.

Because of Congressional cuts in IRS budgets its workforce continues to shrink. From a high of about 92,000 employees in 2010, the IRS now has fewer than 74,000 employees. The cuts have resulted in reduced service to compliant taxpayers and their representatives. The cuts have also encouraged and empowered non-compliant taxpayers. There have been dramatic drops in enforcement activity by the IRS. Examinations are down over 25%. Levies against delinquent taxpayers are down over 50% and there are 40% fewer criminal investigations. See Charts A and B

Chart A - Number of Employees at Close of Fiscal Year

 Chart B - Enforcement Employees

Reduced Service

Without adequate staffing many services once available to taxpayers and their representatives have been reduced or eliminated. In 2015 only 37.3% of calls to the IRS help line were answered. That number jumped to 72.6%in 2016 because of a special allocation by Congress in the 2016 budget.1 Even with increased response in the filing season, IRS ceased answering tax questions after April 17 on its help line. As a result of budget constraints IRS no longer provides advice to walk-ins. Taxpayers must schedule an appointment in advance to speak personally with an IRS representative. The IRS has also eliminated assisting taxpayers in the preparation of their returns. In an effort to meet budget constraints the IRS has also closed many of its walk-in sites forcing taxpayers to travel long distances to receive face-to-face advice. The taxpayer Advocate has noted that these service cuts disproportionately harm the poor and seniors.2 Practitioners calling the Practitioner Priority Case 800 number face extended wait times and on many occasions are disconnected automatically by the system as a result of an IRS policy known as “courtesy disconnects.”

Taxpayers and their representatives corresponding with the IRS also have found the Service to be unresponsive. Many times they receive form letters stating the IRS has not had time to review the response and that response will be delayed 60 days. That response is followed by another letter stating that the Service needs another 60 days. Those trying to be responsive to the IRS and resolve problems find that it is almost impossible to effectively reach a satisfactory result.

Another problem harming compliant Americans is the IRS Revenue Protection System. In an effort to prevent identity theft additional computer screens have been placed in the systems. That system erroneously flagged over 700,000 refunds during the 2016 filing season. Those whose refunds are frozen may not even receive a notice from the IRS. When one finally calls to inquire about the frozen refund she is referred to another 800 number, 800-830-5084. The victim who calls the hotline will be subjected to interminable wait times only to be followed by extensive demands for information from her 2014 and 2015 tax returns. Clients have related that they were treated like a criminal simply because they merely sought to receive their refund. The Taxpayer Advocate listed the Revenue Protection system #4 on her list of problems at the IRS in her 2015 report to Congress.

Enforcement

Non-compliant taxpayers have reasons to rejoice as the IRS now lacks the resources to pursue them. About 82% of Americans are fully compliant 3 yet the IRS only has resources to pursue a diminishing part of that group. The IRS only managed to audit .8% of individual returns in 2015 and that number is down from 1.10% in 2010. In 2010 the Service collected $16.9 billion from audits.4 In 2015 that number had dropped to $7.32 billion. The six years of budget cuts have taken about $1 billion dollars from the total IRS enforcement budget and as direct result the American taxpayers have suffered an over $9 billion loss in additional revenue from those filing inaccurate returns. The reduction in enforcement is also dramatic for those who owe taxes. Fewer and fewer delinquent taxpayers have levies issued against their assets and liens filed against them. See Chart C

Chart C - IRS Action

A 2015 Government Accountability Office report found that the IRS’ uncollected tax debts rose 23% since 2009 to $380 billion while the agency’s collection staff fell 23% during the same period after years of budget cuts. Therefore the budget cuts have also reduced revenue from taxpayers who choose not to pay their taxes by billions.

The sad state of the IRS’ ability to pursue enforcement is also illustrated by statistics of criminal investigations. Each year the IRS is pursuing fewer criminal investigations. That effect of criminal enforcement on compliance cannot be quantified but it is undeniable that one reason Americans are compliant taxpayers is because they fear discovery of their bad tax conduct. See Chart D

Chart D - IRS Enforcement

Conclusion

American taxpayers have historically been among the most compliant taxpayers in the world but our Congress has chosen to empowered tax dodgers and unduly burden compliant taxpayers and their tax advisors though a series of ill-advised budget cuts. Each of those cuts created false economies because of the proven ability of the IRS to efficiently generate revenue from noncompliant taxpayers when it is properly funded.

1 2016 Taxpayer Advocate report to Congress
2 Taxpayer Advocate’s Report to Congress January, 2016
3 IRS National Research Program Report for 2008-2010 returns
4 2015 IRS Data Book

Details

Written by: Hitendra R. Patil

Published: 09 January 2017

According to the August 2016 data “Self - employment In The United States” published by Bureau of Labor Statistics, nearly 15 million people were self-employed, or about 10% of all U.S. workers. Self-employed, includes those who had incorporated their businesses and those who had not. A “broader” category of “freelancers” indicates there are 40-42 million such people in US.

The IRS’ “2016 Instructions for Form 1099-Misc” lists the criteria for reporting 1099 income. Hidden in those criteria are the new revenue opportunities for accountants! Accountants can connect the dots that cause shifts in the economic environment to grab the resulting opportunities.

1. 1099 Workers and Accountants

Many of these 1099 workers may not even recognize their tax liabilities. It is only when they meet their tax preparer, they will get to know they need to classify their income from 1099 sources. Just like the proverbial “shoe box of receipts and statements” small business owners bring to their accountants right during the busy tax season.

Accountants can avoid such last-minute situations with some proactive work. It will be prudent for accountants to ask their existing individual tax clients if they had the types of incomes that could qualify for 1099 Tax reporting.

2. Businesses that Deploy 1099 Workers and Accountants

With the platform-economy (e.g. Uber, Lyft) usage exploding to mammoth proportions, it is not clear if those who earn income from these platforms get any tax guidance. There could be several such smaller platforms people use to find gigs. The existing business clients of accountants may be using 1099 workers for various tasks.

When accountants do the bookkeeping and accounting of their business clients, if they observe such payments that qualify for 1099 tax form, it gives three opportunities to accountants:

a). To provide consulting to the business owners on tax implications and compliance needs.

b). To reach out to those 1099 workers to explore possibilities for tax preparation services for such workers. A referral from the business owner makes your job easier!

c). In most cases, the 1099 worker will also be working with other businesses. Once you reach any 1099 worker with tax compliance service, you can get leads, and referrals to other business owners. And then the cycle can repeat!

3. Look Out for Stealth Touch Points

Did you use an Uber car last month? Did you hire an independent contractor to mow the lawn? Did you get a plumbing job done from an individual service provider? It is likely that some of the routine, repetitive, household or sundry jobs are now done by self-employed persons rather than some contractor company employees. What about similar experiences your firm’s staff goes through? Do they use similar services?

Do you have a brief, crisp and clear – dos and don’ts – info-brochure to give away to these individuals when you interact with them?

There are several stealth touch points you and your firm’s staff must be going through every day. Leverage those opportunities to educate such 1099 workers. Tell them about income and expense categorizations, self-employment taxes, expenses, deductions, home office deductions, work-use devices deductions, transportation expenses deductions, health insurance deductions and IRAs.

4. Your Pricing

Studies indicate that the shared economy workers are likely to have lower income levels than those in regular jobs. Their spending capacity may therefore be comparatively lower. Do you expect them to pay higher tax consulting fees or even tax prep fees?

To optimize your costs, it might be a good idea to standardize your package and process of providing service to these 1099 workers. But treating them as the so called “commodity buyers” can be a mistake. What if they can provide you referrals to five to 10 businesses? What if they can offer you their time and services in barter? What if they can pay you referral fees? Remember, they are entrepreneurs. Their business makes them deal with many people. Their network is perfectly poised to buy accounting and tax services from you. Consider all such factors into your pricing.

5. Market Shift Requires Paradigm Shift

"The entrepreneur always searches for change, responds to it, and exploits it as an opportunity." – Peter Drucker

Whenever there are market shifts – in demographics, in regulatory environment, in generational behavior pattern or technological, they always create new needs and gaps that need to be filled. Market changes can have huge implications. For example, reports indicate the global demand for regulatory, compliance and governance software is expected to reach $118.7 billion by 2020.

Being entrepreneurial is something accounting and tax profession cannot afford to miss.

"Every human being I have ever met, irrespective of the business, the job or life situation they are in, possesses at least one and normally multiple instant jackpots that are within their grasp. All they have to do is recognize them, believe that they are there, and believe that they are entitled to harvest them and the financial and the personal wealth and riches that come along with them." – Jay Abraham

Hitendra R. Patil, the author of  “Accountaneur: The Entrepreneurial Accountant” explores how insights from behavioral economics apply to the tax and accounting profession.

Details

Written by: Peter J. Scalise

Published: 19 December 2016

On November 4, 2016, New York State Governor Andrew Cuomo signed Chapter 420 of the Laws of 2016 which expanded the New York State Film Tax Credit Program (NYSFTCP) for qualified production companies that produce feature films, television series, relocated television series, television pilots, television movies and/or incur post-production costs associated with the original creation of these aforementioned film productions. More specifically, this new legislation affords an additional 10% tax credit under the NYSFTCP on labor costs above $500,000 for eligible film productions to include an additional twelve counties outside of the New York Metropolitan Commuter Transportation District (MCTD). The MCTD includes, but is not limited to, Orange County, Ulster County and Sullivan County. It should be duly recalled that the MCTD includes, but is not limited to, New York City, Rockland County and Westchester County.

The bill was sponsored by New York State Assemblymember Aileen M. Gunther, D-Forestburgh, and New York State Senator George A. Amedore Jr., R-Rotterdam. Assemblymember Gunther stated, “the film industry has brought billions in revenue to the State of New York and expanding the film incentives program to an additional twelve counties outside the MCTD will enable our communities to tap into that revenue, while creating new jobs and advancing the local economy." State Senator Amedore Jr. indicated “by expanding the film tax credit, we are leveling the playing field and will ensure that more counties — particularly in the Capital Region and the Hudson Valley — can take advantage of and benefit from this program.”

Ulster County Executive Michael Hein indicated in a prepared statement, “this film tax credit is integral to further expanding our creative economy, leveling the playing field among upstate counties and creating high-quality film industry jobs right here in Ulster County.” Hein said of Governor Cuomo, in signing the bill, “our Governor recognizes the economic importance of the entertainment industry in New York State.”

In a separate press release, the Hudson Valley Film Commission stated, “the additional incentive places no additional burden on the existing NYSFTCP and allows the Mid-Hudson region to compete on a level playing field with other regions, produce revenue opportunities for local vendors, create a steady demand for services and hospitality, promote the region around the globe, increase opportunities for industry members and youth, create more regional opportunities for industry union members and generate infrastructure investments locally.” The Hudson Valley Film commission further stated, “with this added 10% bump in the film tax credit, the Mid-Hudson Valley will be a go-to location for series television and film production.”

As a direct result of these advantageous movie and television incentives, New York State filmmakers will be able to ecstatically end their productions saying, “lights, camera, action and tax cut!”

Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for the Americas at Prager Metis CPAs, LLC a member of The Prager Metis International Group. Peter is a BIG 4 Alumni Tax Practice Leader and has over twenty years of progressive CPA Firm experience developing, managing and leading multi-million dollar tax advisory practices on a regional, national, and global level. Peter serves on both the Board of Directors and Board of Editors for The American Society of Tax Professionals (ASTP). Peter is the Founding President and Chairman of both The Northeastern Region Tax Roundtable and The Washington National Tax Roundtable, operating divisions of ASTP.