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Professional Issues Webcast. Fred Timmons, TSCPA Chairman John Sharbaugh, TSCPA CEO Bob Owen, TSCPA Managing Director, Regulation & Legislation. The 83 rd Texas Legislature. TSCPA Results. What a Difference 2 Years Makes. Money to spend More new legislators More conservative legislators

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Professional Issues Webcast

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professional issues webcast

Professional Issues Webcast

Fred Timmons, TSCPA Chairman

John Sharbaugh, TSCPA CEO

Bob Owen, TSCPA Managing Director, Regulation & Legislation

what a difference 2 years makes
What a Difference 2 Years Makes
  • Money to spend
  • More new legislators
  • More conservative legislators
  • More bipartisanship
  • Republicans in charge, but more benevolent
  • Democrats still opposed, but less disruptive
  • House vs. Senate distrust
tscpa legislative agenda
TSCPA Legislative Agenda
  • Changes to the Accountancy Act
  • SDSI Sunset Renewal
  • Margin Tax Recommendations
  • Oppose Sales Taxes on Professional Services
accountancy act changes
Accountancy Act Changes
  • Senate Bill 228 (House Bill 608)
  • Authored by CPAs Sen. Williams and Rep. Otto
    • Strengthen accountant-client privilege by requiring a judge to sign a subpoena
    • Make an exception to client confidentiality for PCAOB, Texas Securities Act and practice merger or acquisition negotiations
    • Strengthen investigation confidentiality, including changes to the Texas Open Meetings Act
    • Repeal exam provisions no longer relevant to the current computerized examination process
    • Repeal the prohibition against waiver of fees and penalties
progress to passage
Progress to Passage
  • Cleared Senate committee Feb. 5th
  • Passed Senate Mar. 13th
  • Cleared House committee Mar. 19th
  • Passed House Apr. 25th
  • Sent to the governor May 1st
  • Signed by the governor May 10th
sdsi sunset renewal
SDSI Sunset Renewal
  • House Bill 1685/Senate Bill 208
  • Authored by Rep. Price and Sen. Whitmire
  • Fifth-year scholarship issue
  • SDSI Reforms – modeled after TSBPA
  • House committee hearing March 26th
  • Passed House committee April 2nd
  • Passed House April 23rd
  • Passed Senate committee April 30th
  • Passed Senate May 9th
  • Signed by the governor May 24th
  • Effective date September 1st
the bonus



Sunset Model Development

bill monitoring

Bill Monitoring

“Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you.”

From Pericles (430 BC)

bill monitoring1
Bill Monitoring
  • 1,047 bills reviewed
  • 514 bills monitored
  • Bill monitoring process
  • Legislative Advisory Executive Committee
  • Bill intervention – Key Persons
monitored bill action
Monitored Bill Action
  • HB 1756 by CPA Stephenson – Eliminates peer review for Compilations and restricts what TSCPA can charge non-members
    • Committee hearing
    • Died in committee
  • HB 1757 by CPA Stephenson – Mandates two solo practitioners on TSBPA and requires all CPA positions on the board to be CPAs in public practice
    • No committee hearing – died in committee
monitored bill action cont d
Monitored Bill Action (Cont’d)
  • HB 3488 by Burkett – GAAP exception for governments – died in committee w/o hearing
  • SB 176 by Carona to require public disclosure of all reports by state agency contractors – fixed and passed
  • HB 798 by Thompson to prohibit licensing agencies from denying a license due to a Class C Misdemeanors – passed
monitored bill action cont d1
Monitored Bill Action (Cont’d)
  • HB 87 by Callegari that would give non-certified and non-licensed accountants the opportunity to practice accounting
    • We opposed and testified against at the hearing
    • We worked with Callegari on extensive revisions
    • Revisions were not completely satisfactory
    • Bill voted from Committee
    • We agreed to disagree
    • Bill died in Calendars
other stuff
Other Stuff
  • Infrastructure: water runs; roads blocked
  • Public education – funding and fundamentals
  • Gun bills were debated all day on Saturday
  • Prohibiting Medicaid expansion
  • Texting while driving ban – died in the Senate
  • Transparency for political groups – Perry veto
  • Gambling loses again
  • Craft beer distribution liberalized
  • Payday lending regulation defeated
the important stuff
The Important Stuff
  • Pecan pie is the official State Pie of Texas
  • Feb. 16 is Texas Homemade Pie Day
  • Peach Cobbler is the official State Cobbler of Texas
  • Shamrock St. Patrick’s Day celebration is the official St. Patrick’s Day Celebration of Texas
  • Nacogdoches is the official Garden Capital of Texas
  • The City of Canton is the Walking Capital of Texas
  • The Small Town Christmas celebration in Bellville is the official Small Town Christmas Event in Texas
  • The first week in May is Texas Bison Week
  • Gregg County is the Balloon Race Capital of Texas
  • The Kemp’s ridley sea turtle is the official State Sea Turtle
cpas on capitol hill

CPAs on Capitol Hill

AICPA Council Meeting

May 19-21, 2013

Washington, D.C.

texas council delegation
Texas Council Delegation
  • Currently 15 TSCPA members serve on AICPA Council
  • One of the largest Council delegations in the country
  • Council normally meets in full session twice a year in the Spring & Fall
  • Every other year the Spring Meeting is held in Washington, DC and Council members conduct visits with their Members of Congress
  • Our group met with 24 Congressional offices during our two days
this year s issues for hill visits
This Year’s Issues for Hill Visits
  • Tax Reform
  • Federal Financial Responsibility
  • Mobile Workforce State Income Tax Simplification
  • Tax Return Due Date Simplification
  • Amending Municipal Advisors Registration Requirements
  • Texas specific item – TSCPA Federal Tax Policy Committee’s Analysis of proposals to repeal tax treatments of domestic oil and gas exploration & development
tax reform

Tax Reform

Guiding Principles of Good Tax Policy

tax reform1
Tax Reform
  • AICPA and TSCPA do not take a position on what is the “best solution” for reforming the federal tax system
  • We aim to provide unbiased facts and analysis to foster informed discussion
  • We have consistently supported tax reform simplification efforts because we are convinced it will significantly reduce taxpayer’s compliance costs, encourage voluntary compliance through an understanding of the rules, and facilitate enforcement actions
guiding principles of good tax policy
Guiding Principles of Good Tax Policy
  • Equity and fairness. Similarly situated taxpayers should be taxed similarly
  • Note: Equity is best measured by considering a range of taxes paid, not by looking just at a single tax
  • Certainty. Tax rules should clearly specify when and how a tax is to be paid and how the amount will be determined. Certainty may be viewed as the level of confidence a person has that a tax is being calculated correctly
  • Convenience of Payment. A tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer
  • Economy of calculation. The costs to collect a tax should be kept to a minimum for both the government and the taxpayer
  • Simplicity. Taxpayers should be able to understand the rules and comply with them correctly and in a cost-efficient manner
guiding principles of good tax policy1
Guiding Principles of Good Tax Policy
  • Neutrality. The tax law’s effect on a taxpayer’s decision whether or how to carry out a particular transaction should be kept to a minimum
  • Economic growth and efficiency. A tax system should not impede productivity but should be aligned with the taxing jurisdiction’s economic goals
  • Transparency and visibility. Taxpayers should know that a tax exists, and how and when it is imposed on them and others
  • Minimum tax gap. A tax should be structured to minimize noncompliance
  • Appropriate government revenues. A tax system should enable the government to determine how much tax revenue it likely will collect and when—that is, the system should have some level of predictability and reliability
what s at stake

What's at Stake?

The U.S. Government’s Financial Statements and the Country's Fiscal Health

the role of cpas
The role of CPAs
  • Serve as trusted advisors to a variety of organizations
  • Help businesses and individuals achieve strong financial standing
  • Protect the public interest
  • Explain complex financial issues
u s financial statements differ from other organizations
U.S. financial statements differ from other organizations
  • Most financial statements show obligations or liabilities on balance sheet
  • U.S. government’s financial statements do not include Social Security and Medicare
    • Footnote disclosures
    • Not reflected as liabilities
reality of future obligations
Reality of Future Obligations

These Future obligations equal:

Additional social insurance deficit - $52 trillion

Cumulative deficit - $16 trillion

Total Deficit - $68 trillion

accumulated federal deficit
Accumulated federal deficit





In trillions





court rules tax preparer registration invalid
Court Rules Tax Preparer Registration Invalid
  • IRS began an initiative in 2009 to require tax return preparers to register, prove their competency and take CPE to maintain their registration
  • Also required all tax return preparers to obtain a PTIN (Preparer Tax Identification Number) and provide it on returns they prepare
  • AICPA, TSCPA and other state societies lobbied to have CPAs exempted from the testing and CPE provisions of the new registration scheme
court overrules irs
Court Overrules IRS
  • In January, a federal judge in the U.S. District Court for the District of Columbia granted a permanent injunction to stop the IRS tax return regulatory program
  • Suit was filed by three independent tax preparers from Chicago, N.J. and Wisconsin and the Institute for Justice, a conservative civil-liberties advocacy group
  • They accused the IRS of enforcing the requirements without Congressional approval
  • The Court agreed with the plaintiffs and said the program affected their livelihood
irs appeal fails
IRS Appeal Fails
  • IRS appealed the decision to the United States Court of Appeals
  • But in March the District of Columbia Circuit Court of Appeals three-judge panel upheld the earlier decision
  • So the mandatory testing and CPE components of the program are suspended, although preparers could pursue those on a voluntary basis
  • The registration piece is still in place so all paid tax return preparers (including CPAs) still need to have a PTIN
  • IRS is appealing again, but there has been no court date set and this process will take time
legislation proposed
Legislation Proposed
  • H.R. 1570: Taxpayer Protection and Preparer Fraud Prevention Act of 2013 introduced on 4/15/13 in U.S. House by Rep. Cedric Richmond (D – LA)
  • Basically would give the Secretary of the Treasury the authority to license and regulate tax return preparers
  • No co-sponsors and not much chance of passing
mobile workforce legislation1
Mobile Workforce Legislation
  • Provides a 30-day threshold before a state may impose a tax on, or require withholding from, the wages of nonresidents working in the state
  • TSCPA, AICPA and other state CPA societies are supporting this legislation
  • Legislation in the last Congress had support and was passed in the House but did not get passed in the Senate
  • Then Senator Kay Bailey Hutchison was the lead Republican sponsor in the Senate last year
legislation back this year
Legislation Back This Year
  • HR 1129 – same legislation as last year has been introduced by Reps. Howard Coble (R-NC) and Hank Johnson (D-GA)
  • Rep. Blake Farenthold (R-TX) and Rep. Steve Stockman (R-TX) are co-sponsors
  • We expect Senator Sherrod Brown (D-OH) to reintroduce legislation in the Senate sometime soon
  • TSCPA sent letters a few weeks ago to Texas House members
  • We are hopeful that this legislation will pass this year
tax return due date legislation
Tax Return Due Date Legislation
  • The delivery of K-1 Schedules close to tax return filing deadlines makes it nearly impossible for taxpayers and their tax advisers to prepare and file timely, accurate returns 
  • Schedule K-1 information is a component of millions of tax returns of individuals, S and C corporations, trusts, estates, partnerships and other entities
  • Taxpayers and their CPAs need the information included in the Schedules K-1, which are issued by partnerships, S corporations, some trusts and estates, so that the owners and beneficiaries can file personal and business tax returns 
  • However, the information returns often arrive just days before either the original or extended return due date
house senate bills
House & Senate Bills
  • Legislation in the Housed and Senate last Congress but was not successful
  • Reintroduced again this year
  • H.R. 901 sponsored by Rep. Lynn Jenkins (R-KS) and S. 420 by Sen. Mike Enzi (R-WY)
  • TSCPA and AICPA are working to see this legislation passed
  • TSCPA sent letters requesting from Texas members of Congress
  • Rep. Mike Conaway (R-TX) and Pete Sessions (R-TX) are co-sponsors
marketplace fairness act1
Marketplace Fairness Act
  • Senate Bill S. 743 passed recently
  • Will have a tougher time in the U.S. House (H.R. 684)
  • Grants the states the authority to compel online and catalog retailers, no matter where they are located, to collect sales tax at the time of a transaction
  • States must simplify their sales tax laws
  • There is an exemption for small businesses with less than $1 million a year in online sales.
states must simplify
States Must Simplify
  • Two options for simplifying their sales tax laws:
    • Join the 24 states that have already voluntarily adopted the Streamlined Sales and Use Tax Agreement (SSUTA) (note: Texas is not currently part of SSUTA);
  • or
    • meet five simplification mandates listed in the bill. They are:
      • Notify retailers in advance of any rate change within the state;
      • Designate a single state organization to handle sales tax registrations, filings and audits;
      • Establish a uniform sales tax base for use throughout the state;
      • Use destination sourcing to determine sales tax rates for out-of-state purchases;
      • Provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data.
bi partisan support
Bi-partisan Support
  • The legislation has bipartisan support, including sponsorship from:
  • 96 members of Congress (30 senators and 66 representatives)
  • 27 governors (15 Republican, 11 Democrat and one Independent)
  • Large number of national and state trade associations including the Texas Retail Association
  • Businesses of all sizes, including Amazon and Wal-Mart
texas support
Texas Support
  • Governor Perry is not on the list of governors supporting and neither are either of our two U.S. senators from Texas
  • But there are four Texas congressmen on the list – Joe Barton (R), Mike Conaway, CPA (R), Eddie Johnson (D) and Marc Veacy (D)
  • Supporters say it is a matter of fairness and assuring a “level playing field” between brick and mortar retailers and online retailers. And it is also a concern to most states that support themselves off sales taxes
internet commerce is growing
Internet Commerce is Growing
  • Internet commerce is growing
  • Last year, Internet sales were $226 billion, up nearly 16 percent from the previous year according to the Commerce Department
  • The National Conference of State Legislatures estimates that states lost $23 billion last year because they couldn’t collect taxes on out-of-state sales
municipal advisors registration requirements1
Municipal Advisors Registration Requirements
  • Stemming from concerns about municipalities’ debt offerings, the Dodd-Frank Act addressed a change in the registration requirements for municipal advisors
  • The law defined municipal advisors to include, among other things, financial advisors
  • In the proposed rules to implement Dodd-Frank, the SEC did not carve out CPAs from the definition of municipal advisors
  • Many of the normal services that CPAs provide – like audit services or issuance of letters for underwriters - would not constitute the provision of financial advice
municipal advisors registration
Municipal Advisors Registration
  • The profession sought relief from the requirement from Congress
  • In the last Congress legislation passed in the House
  • New legislation has been introduced this year - H.B. 797
  • Still awaiting a bill in the Senate but anticipate one will be introduced
  • Legislation will provide an exemption from registration for CPAs performing “customary and usual” accounting services for municipal clients
proposed repeal of certain tax treatments of domestic oil gas exploration and development

Proposed Repeal of Certain Tax Treatments of Domestic Oil & Gas Exploration and Development

Analysis by the TSCPA Federal Tax Policy Committee

tscpa analysis key points
TSCPA Analysis – Key Points
  • Importance of Oil & Gas Drilling to the economy – Texas and the U.S.
  • Financing Oil & Gas Drilling
  • Tax Treatment of Oil & Gas Drilling
    • Intangible drilling costs
    • Percentage depletion
    • The domestic production activities deduction
    • Deduction for tertiary injectants
    • Amortization of geological and geophysical expenditures
    • Use of LIFO inventory method for oil & gas
    • Passive loss exception for working interest in oil & gas properties
small independent producers
Small Independent Producers
  • Many people often associate the oil & gas industry with huge multinational corporations
  • 95% of the nation’s oil & gas wells area actually drilled by small businesses, referred to as “independent producers”
  • They employ on average no more than 12 people
  • They rely upon the existing tax treatments which help keep domestic jobs from being exported overseas
  • This TSCPA Analysis provides an objective look at the tax treatments and how they compare to other industries and manufacturers
break time


The Webcast will return after a short break – please rejoin us then

budget package
Budget Package
  • SB 1 – $197 billion biennial budget
  • HB 1025 – Supplemental Appropriations
    • $1 billion from General Revenue Fund
    • $3.9 billion from Economic Stabilization Fund
  • SJR 1 – Water Revolving Fund
  • HB 4 – Water implementing legislation
  • HB 7 – Elimination of the System Benefit Fund
  • HB 500 – Franchise Tax Cuts
  • HB 800 – R & D credits
  • Total tax cuts = $1.4 billion; Is it enough?
franchise tax reform

Franchise Tax Reform

$715 Million Revenue Reduction

over 80 franchise tax bills filed
Over 80 Franchise Tax Bills Filed
  • Repeal the tax
  • Reduce the rate
  • $1 million revenue exemption/deduction
  • To benefit a specific industry or sector
  • Changes to the Cost of goods sold deduction
  • R & D and other credits
    • jury pay
    • taxpayer recruitment
    • graduates of certain institutions
    • energy generating equipment
    • energy efficient single family homes
    • jobs creation
tscpa margin tax recommendations
TSCPA Margin Tax Recommendations
  • HB 900 by Taylor and HB 1672 by CPA Perry:
    • Federal COGS – No Hearing
  • HB 1463 by Hughes
    • Independent contractor deductions – Cost $290 million
  • HB 1836 by Zedler
    • Exemption for all flow-through funds – Cost $435 million
  • HB 2347 by Zedler
    • All TSCPA recommendations – Cost $1 billion+-No Hearing
  • HB 2385 by Capriglione
    • Repeals Finnegan reporting requirement – No cost!
    • Passed House May 10th
    • Failed in the Senate, but included in HB 500
franchise tax bills passed
Franchise Tax Bills Passed
  • HB 800 - R&D credits and exemptions
    • Also provides sales tax exemptions
    • Cost $239 million
  • HB 2766 – Flow through revenue exemption for subcontractors and remediation
    • No fiscal implications
  • HB 2451 – COGS deductions for crop dusters
    • Cost $288,000
  • HB 500 – Omnibus bill
    • Cost $715 million
hb 500 provisions
HB 500 Provisions
  • Temporary Rate Reductions
    • Returns due in 2014: 0.975% and 0.4875%
    • Returns due in 2015: 0.095% and 0.475%
  • $1 million revenue exemption
    • Made permanent
    • Added as an alternative deduction
    • Inflation adjusted every two years
  • Compensation deduction inflation adjusted
hb 500 provisions cont d
HB 500 Provisions (cont’d)

New Retail and Wholesale Industries

  • SIC 753 – Automotive repair shops
  • SIC 7353 – Heavy construction equipment rental or leasing
  • SIC 7359 – Equipment rental and leasing – NEC
  • Rental-purchase agreement activities - Chapter 92, Business and Commerce Code

Separation of retail/wholesale utilities from other retail/wholesale entities

hb 500 provisions cont d1
HB 500 Provisions (cont’d)

New flow-through revenue exemptions

  • Pharmacy network rebates
  • Transportation or delivery costs incurred by:
    • Aggregate transporters
    • Barite transporters
    • Waterway transporters for waterway transportation costs
  • Landman services for Landman companies
  • Cost of vaccines
  • Taxes and fees incurred by registered motor carriers
  • Relocation costs for entities moving to Texas
hb 500 provisions cont d2
HB 500 Provisions (cont’d)

New cost of goods sold deductions

  • Petroleum pipelines - cost of transporting non-owned products
  • Movie theaters - all cost of showing movies
hb 500 provisions cont d3
HB 500 Provisions (cont’d)

Apportionment reporting eliminated

  • Joyce method of apportionment used for the tax
  • Finnegan method reporting only eliminated

Repeals Sections 171.103(c) and (d), Tax Code, relating to the requirement that a taxable entity that is a combined group include in the group's initial and annual franchise tax reports information regarding the gross receipts of group members who do not have a nexus with Texas.

hb 500 provisions cont d4
HB 500 Provisions (cont’d)
  • Internet hosting: Texas receipts are only those receipts from customers located in Texas
  • Exempts insurance companies that pay a gross receipts tax from the franchise tax
  • Exempts certain political subdivision corporations from the franchise tax
  • Provides a transferable franchise tax credit for rehabilitation of certified historic structures
legislator s have gone home

Legislator’s have gone home!

You can take your hand off your wallet!

They actually reduced taxes!

aicpa financial reporting framework for smes
AICPA Financial Reporting Framework for SMEs
  • Designed for Small & Medium-Sized Entities (SMEs)
  • Intended for entities that are not required to prepare GAAP financial statements
  • Emphasizes historical cost over fair value
  • Calls for reporting of costs when they are incurred and revenue when performance is achieved with reasonable assurance that collection will occur
  • Exposure period ended in late January
  • Final Framework will be issued soon
key features of the framework
Key Features of the Framework
  • The FRF for SMEs includes a combination of accrual and income tax accounting methods.
  • It is a less complicated and less costly framework when U.S. GAAP based financial statements are not required.
  • It is not proposed as an authoritative framework and its use is not required.
  • Management of SMEs would have the option of choosing the FRF for SMEs as its applicable reporting framework.
benefits to financial statement users
Benefits to Financial Statement Users
  • The primary measurement basis is historical cost.
  • Relevant information is included in footnote disclosure which are fewer than under U.S. GAAP.
  • Accounting methods are traditional and understandable by most users of financial statements.
  • Fewer reconciling items are necessary to reconcile book income with tax income.
  • The framework is based on principles applicable to most industries for incorporated and unincorporated entities.
  • It addresses only the typical financial statement matters encountered by SMEs.
other benefits
Other Benefits
  • Traditional accounting methods and accrual income tax methods are blended into the proposed framework. Preparers who follow the proposed framework will find that it reduces the number of Schedule M differences that a business would have to report on its tax returns to reconcile its financial statements to its taxable income
  • As proposed, the framework is designed to facilitate the creation of financial statements that provide users, especially banks, the information they need without unnecessary disclosures that increase the time and expense of preparation
not for those going public
Not for those going Public
  • SMEs run by owner-managers are expected to find the proposed framework especially useful, as the financial statements prepared under the framework will confirm their assessments of performance, describe what they owe and own, and help users understand cash flows
  • The proposed framework is intended for SMEs whose financial statement users have direct access to management, and is intended for companies that have no intention of going public
private company standards
Private Company Standards
  • FAF created the Private Company Council last Fall to identify and vote on potential modifications and exceptions to U.S. GAAP for private companies
  • Billy Atkinson of Texas is the Chair of this new group
  • Held its first meeting in December to begin its work
private company standards1

Private Company Standards

Update on the PCC at FASB

private company standards2
Private Company Standards
  • FAF created the Private Company Council last Fall to identify and vote on potential modifications and exceptions to U.S. GAAP for private companies
  • Billy Atkinson of Texas is the Chair of this new group
  • Held its first meeting this past December to begin its work
  • Two subsequent meetings held in February and May
pcc decision making framework
PCC Decision-Making Framework

ID and make exceptions and modifications in 5 areas based on differential factors (types of users, access to management, etc.)

Recognition and Measurement

Display (Presentation)


Effective Date

Transition Method

Apply to PCC look-back projects and to ongoing FASB projects

Tool for the PCC and the FASB

initial issues pcc looking at
Initial Issues PCC Looking At
  • VIEs. The requirements of FIN 46(R), codified in ASC Topic 810, Consolidation, were created in the wake of Enron’s collapse in order to prevent the hiding of liabilities on the balance sheets of dummy corporations. FIN 46(R) requires consolidation of the financial data of a VIE with the company that is the VIE’s primary beneficiary. This forces consolidation, for instance, when an owner of a small business buys property through his or her LLC and leases it back to the company. This is costly and does not necessarily create financial statements that are more helpful to users such as lenders
  • Fair value accounting. The discussion will apply to “plain vanilla” interest-rate swaps, where FASB Statement No. 133, codified in ASC Topic 815, Derivatives and Hedging, requires costly mark-to-market accounting
initial issues pcc looking at1
Initial Issues PCC Looking At
  • Recognizing and measuring various intangible assets (other than goodwill) acquired in business combinations. This discussion will include Level 3 fair value measurements and disclosures associated with them, as referenced in ASC Topic 805, Business Combinations. The PCC also plans to discuss goodwill accounting in general at a later date
  • Uncertain tax positions. FIN 48, mostly incorporated into ASC Topic 740, Income Taxes, requires companies to record a tax liability on their balance sheets, showing how much they have in reserve in case the IRS or state tax authorities disagree with their tax positions. The calculation is time-consuming and expensive, and is thought by some to be an appropriate requirement for large public companies that are audited regularly, but less appropriate for private companies.
actions at the may pcc meeting
Actions at the May PCC Meeting
  • Provide relief from separately recognizing certain intangible assets acquired in a business combination
  • Allowing for the amortization of goodwill and a simplified goodwill impairment model
  • Allowing two simpler approaches to accounting for certain types of interest rate swaps when a private company intends to economically convert the interest rate on its debt.
exposure period
Exposure Period
  • These items will go through an exposure process
  • Hopefully these proposed alternatives will be adopted quickly to improve financial reporting for private companies
  • The PCC will continue to look at other areas and issues for improvement
  • They are off and running on their charge
  • The PCC’s next meeting is set for July 16
new coso integrated framework
New COSO Integrated Framework
  • COSO – the Committee of Sponsoring Organizations of the Treadway Commission
  • In 1992 issued its original “Internal Control – Integrated Framework”
  • Recognized as the leading framework for designing, implementing and conducting internal control and assessing the effectiveness of internal control
  • Accepted by the S.E.C. as the framework for attesting to internal control over financial reporting as required by SOX
  • The new Framework better reflects the technology and globalization that have become an increasingly important part of the current business environment

Why updatewhat works – The Framework has become the most widely adopted control framework worldwide.

COSO’s Internal Control–Integrated Framework (1992 Edition)

Original Framework

Articulate principles to facilitate effective internal control

Reflect changes in business & operating environments

Expand operations and reporting objectives

Refresh Objectives

Broadens Application

Clarifies Requirements




Updated Framework

COSO’s Internal Control–Integrated Framework (2013 Edition)

project timetable
Project timetable

Assess & Survey Stakeholders

Design & Build

Public Exposure, Assess & Refine






project participants
Project participants


Board of Directors


Author &

Project Leader

  • COSO Advisory Council
  • AAA
  • FEI
  • IIA
  • IMA
  • Public Accounting Firms
  • Regulatory observers (SEC, GAO, FDIC, PCAOB)
  • Others (IFAC, ISACA, others)
  • Stakeholders
  • Over 700 stakeholders in Framework responded to global survey during 2011
  • Over 200 stakeholders publically commented on proposed updates to Framework during first quarter of 2012
  • Over 50 stakeholders publically commented on proposed updates in last quarter of 2012
internal control integrated framework 2013 edition
Internal Control-Integrated Framework (2013 Edition)
  • Consists of three volumes:
    • Executive Summary
    • Framework and Appendices
    • Illustrative Tools for Assessing Effectiveness of a System of Internal Control
  • Sets out:
    • Definition of internal control
    • Categories of objectives
    • Components and principles of internal control
    • Requirements for effectiveness

Update considers changes in business and operating environments

COSO Cube (2013 Edition)

update articulates principles of effective internal control
Update articulates principles of effective internal control

Control Environment

  • Demonstrates commitment to integrity and ethical values
  • Exercises oversight responsibility
  • Establishes structure, authority and responsibility
  • Demonstrates commitment to competence
  • Enforces accountability

Risk Assessment

  • Specifies suitable objectives
  • Identifies and analyzes risk
  • Assesses fraud risk
  • Identifies and analyzes significant change

Control Activities

  • Selects and develops control activities

11. Selects and develops general controls over technology

  • Deploys through policies and procedures

Information & Communication

Uses relevant information

Communicates internally

Communicates externally

Monitoring Activities

Conducts ongoing and/or separate evaluations

Evaluates and communicates deficiencies

transition impact
Transition & Impact
  • Users are encouraged to transition applications and related documentation to the updated Framework as soon as feasible
  • Updated Framework will supersede original Framework at the end of the transition period (i.e., December 15, 2014)
  • During the transition period, external reporting should disclose whether the original or updated version of the Framework was used
  • Impact of adopting the updated Framework will vary by organization
      • Does your system of internal control need to address changes in business?
      • Does your system of internal control need to be updated to address all principles?
      • Does your organization apply and interpret the original framework in the same manner as COSO?

- Is your organization considering new opportunities to apply internal control to cover additional objectives?

analysis of auditor deficiencies in sec fraud investigations
Analysis of Auditor Deficiencies in SEC Fraud Investigations
  • Academic study funded by the Center for Audit Quality
  • Scrutinizes the role of the external auditor in fraudulent financial reporting
  • Covered a thirteen year period from 1998 – 2010
  • 87 sanctions against external auditors in SEC investigations involving publicly traded companies
  • Only 11 of the 87 instances of alleged auditor deficiencies occurred after 2003 and the passage of SOX in 2002
types of companies
Types of Companies
  • Size of companies involved was small with median assets and revenues under $40 million
  • Concentrated in four key industries (40% of sample)
    • Financial services/insurance
    • General manufacturing
    • Telecommunications
    • Consumer goods manufacturing
types of cpa firms
Types of CPA Firms
  • Audits performed by non-national firms – 46
  • Audits performed by national firms - 35
  • Bogus audits - 6
  • Of the 35 national firm cases – 9 involved audits performed by Arthur Andersen
  • Among the 81 cases, the SEC issued sanctions against individual auditors in 80 cases and against the audit firm in 27 cases
top deficiencies cited
Top Deficiencies Cited
  • Failure to gather sufficient audit evidence (73%)
  • Failure to exercise due professional care (67%)
  • Insufficient level of professional skepticism (60%)
  • Failure to obtain adequate evidence related to management representations (54%)
  • Failure to express an appropriate audit opinion (47%)
  • Most involved multiple alleged deficiencies
  • Deficiencies similar for national and non-national firms
cfo survey

CFO Survey

Grant Thornton

survey background
Survey Background
  • Conducted April 3-24, 2013
  • 1259 CFOs and Comptrollers participated
  • 23% of respondents work for public companies
  • 77% private companies
  • 60% of the private companies earn less than $100 million in total revenue
  • 87% of all companies have revenue of $500 million or less
  • All types of industries participated
  • 17% manufacturing, 15% not-for-profit, 7% technology, 5% retail
topic areas
Topic Areas
  • State of the economy
  • Compensation, benefits and hiring
  • Legislative Issues Affecting Growth
complete results on line
Complete Results on-line

next member webcast
Next Member Webcast

September 18, 2013