Feb. 5, 2010

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Week of Feb. 5, 2010

Obama’s budget and related tax plans will affect the grass roots
February 4, 2010 – President Obama’s State of the Union speech last week outlined a broad agenda of tax provisions that he hopes will breathe new life into the economy. The overall idea is familiar… take more from taxpayers at one end of the financial spectrum and distribute it to some at the other end, using a series a tax maneuvers. According to The Wall Street Journal, Obama’s $3.8 trillion budget for the next decade will collect an additional $2 trillion in taxes from targeted groups, and still leave us with a debt of over $8.5 trillion. The speech itself did not provide a lot of details, but in the days since, flesh is beginning to appear on the budget bones.

 
Auditing Standard No. 7: PCAOB strengthens requirements for engagement quality review
February 4, 2010 - Last week, the Securities and Exchange Commission (SEC) approved a new standard proposed by the Public Company Accounting Oversight Board (PCAOB), Auditing Standard No. 7, Engagement Quality Review (AS 7). As a result, accounting firms performing audits and interim reviews of financial information for public companies should plan to commit more resources, including partner time, to engagement quality reviews for fiscal years beginning on or after December 15, 2009.

 
Fortune reveals its Top 100 List; Big Four make the grade
February 3, 2010 - Fortune magazine has revealed its much-anticipated list of 100 Best Companies to Work for in 2010, with all Big Four accounting firms on the list, along with large regional accounting firm, Plante & Moran of Southfield, Mich., consulting firm Accenture and Intuit, maker of Quicken.

 
Google/Microsoft face off over cloud-based storage
February 3, 2010 - A clash of the Titans is underway between Google and Microsoft, with both players lobbying to be your preferred provider of free online storage space and productivity applications. These are often referred to as being "in the cloud," or cloud-based computing. Cloud-based solutions free users from maintaining programs or backing up data, as the service is done for them automatically by the provider.

 
Nine states and District of Columbia will file tax returns in new locations
February 3, 2010 - The Internal Revenue Service has announced that some taxpayers who file paper income tax returns will send them to different processing centers this year.

Obama’s budget and related tax plans will affect the grass roots
February 4, 2010 -   President Obama’s State of the Union speech last week outlined a broad agenda of tax provisions that he hopes will breathe new life into the economy. The overall idea is familiar… take more from taxpayers at one end of the financial spectrum and distribute it to some at the other end, using a series a tax maneuvers. According to The Wall Street Journal, Obama’s $3.8 trillion budget for the next decade will collect an additional $2 trillion in taxes from targeted groups, and still leave us with a debt of over $8.5 trillion. The speech itself did not provide a lot of details, but in the days since, flesh is beginning to appear on the budget bones. Here are some highlights of Obama’s proposed changes:

Tax provisions affecting individuals:

Making Work Pay Credit. This would be a one year revival of the 2009 payroll credit designed to put $400 additional dollars in the hands of workers, by reducing payroll tax withholding. Obama says that last year, this credit provided $37 billion in relief to 110 million families

Extension of tax cuts for some. According to ABC News, Obama wants to make permanent the tax cuts of the Bush Administration for those earning a maximum of $200,000, and families earning $250,000 or less.

Removal of existing tax cuts for others. Obama has announced his intention to eliminate the Bush tax cuts for the group he refers to as “wealthy.” Currently, income tax rates affecting this group are 33% and 35%. Presumably, under Obama’s plan, the rates will rise to the pre-Bush levels of 36% and 39.6% respectively. The higher rates will apply to those earning more than $250,000. Lewis Taub, a director at RSM McGladrey’s Commercial Group, says that Obama likes to use the terms “wealthy” and “$250,000” equally. However, Taub indicated that the president has not yet defined $250,000 sufficiently for us to know if he is talking about taxable income, gross income, or adjusted gross income. The label “tax increases” is seldom used, but The Wall Street Journal reports that over the next decade, the elimination of the Bush tax cuts will be largely responsible for raising an additional $1 trillion in tax revenue.

Higher capital gains tax. The president also plans to raise capital gains and dividends tax from the current level of 15% up to 20%. Taub predicts that taxpayers with capital gain potential will be seeking a lot of help from their financial advisers before the end of this year. “This is a perfect planning time for clients,” he says. “When capital gains rates are going down, nobody wants to talk to us. Now they will need to do some serious planning.” Taub suggested that it's likely that accountants will be urging clients who are facing significant capital gains to take those gains in 2010, in advance of the tax hike.

Child and Dependent Care Tax Credit. This credit nearly doubles for middle-class families earning under $85,000 a year. It increases the maximum credit rate from 20 percent to 35 percent.

Education credit. Obama is proposing a $10,000 tax credit for those who complete four years of college. Student loan payments would not be allowed to exceed 10% of income and the debt is forgiven after 20 years, or 10 years if the individual takes a job in public service.

COBRA extension. Last year’s 65% reduction of health insurance premiums paid by employees who have lost their jobs could be extended. This provision also affects businesses of course, although the effect is meant to be one of timing because the business pays the health insurance at the 100% rate and later receives reimbursement from the government for the 65% reduction.

Tax provisions affecting business

Small business tax exemption. This is a boost for small publicly traded businesses, in the form of an expanded exclusion of gain from the sale of small business stock. Currently the exclusion is at 75%, and is set to expire at the end of 2010. Obama plans to replace it with a beefier, 100% exclusion.

Analysts say this should make investment in small business stock more attractive, especially when combined with Obama’s plan to raise the capital gains tax on other investments from the current rate of 15% up to 20%. If this becomes law, Taub expects to see more accountants advising clients to choose qualifying small business stock as a tax-favored investment. He predicts that, in the coming months, we will see certain limitations placed on this exclusion. For example, angel investors may have to hold onto the stock for a minimum of five years before selling. There also might be a limitation on the amount of gain that qualifies for the exclusions, Taub suggested, such as the greater of $10 million in gain or ten times the amount of your gain.

Depreciation. In an effort to encourage businesses to invest in plants and equipment, Obama’s budget extends two key depreciation tax breaks, both of which expired at the end of 2009. Before 12/31/09, Section 179 was at its highest level ever: $250,000 for plants and equipment placed in service during the year. For expenditures that exceeded that cap, most businesses also could qualify for the first year bonus deprecation, which allowed a write-off of 50% of the cost of new plants and equipment.

As of January 2010, the Section 179 deduction receded to $134,000, and the first year bonus deprecation disappeared. Obama’s budget would extend the life of both provisions at the 2009 levels.

But some critics have said that, while this could be a boost for businesses, many will have to wait until the economy improves before they can make qualifying purchases. Taub acknowledges the difficulties for businesses that are tight on cash, but sees this provision as a favorable move for business. “It’s a chicken and egg question. The administration is counting on the fact that the economy is already recovering.” He pointed out that at the end of 2009, when the provisions were about to expire, he and his colleagues were already pushing clients to take advantage of the depreciation tax breaks while they could. “Clients do seem to be thinking in terms of expansion already,” he said. “This will further encourage them to invest in expansion, which is tied to jobs.”

Giovanni Coratolo, the vice president of small business policy at the U.S. Chamber of Commerce, agrees that the depreciation provisions are good moves. He told reporters, ““They incentivize businesses to make their businesses more profitable.” They have a “leveraging effect,” he adds, because they also provide revenue for manufacturers of equipment.

Clint Stretch, managing principal for tax policy at Deloitte Tax stated, “Businesses planning for an upturn in the economy would be encouraged to start making the investments in equipment that will be part of getting going again and hiring workers back.”

New tax credit for hiring additional workers and for raising wages. Obama says this provision will help more than a million small businesses. So far, details of this plan have been skimpy. But, suggested Taub, Senator Robert Casey (D-PA) has proposed a similar bill which provides a 20% credit for new hires at companies that have less than 100 employees (Casey’s credit would only go to those who hire new employees).

One possibility, according to some sources, is that this could amount to a tax credit of up to $5,000 that employers could take against payroll taxes for every new hire in 2010. While all firms that hire additional workers would be eligible, limitations and anti-abuse provisions would be in place to ensure that the bulk of the incentive to hire is used by small businesses.

Coratolo doesn’t see a hiring credit as effective. He told reporters, “It’s nice to be able to get a tax break” if you were planning to hire anyway, but unless your company has enough work to keep additional employees occupied, a tax credit would not be enough incentive. Plus, he pointed out that the tax credit is temporary, and a job is meant to be long-term.

A survey taken by the National Small Business Association indicated that this credit would not have much effect on the decision to hire.

Provisions under the radar

According to Taub, the president’s budget addresses several other issues, called sleepers, that get very little press but that could significantly impact businesses.

One of these provisions is the treatment of leasehold improvements. Prior to 2007, leasehold improvements were depreciable over 39 years. For 2007- 2009, that period was reduced to a much more business-friendly 15 years. That provision expired at the end of 2009. Obama has stated his intention to extend the favorable shorter depreciation period.

The administration also proposed the total repeal of the use of the LIFO and the lower of cost or market methods of inventory valuation. “This was a much bigger deal during inflationary times,” said Taub, “when prices of raw materials were always going up.” Obama’s budget includes plans to let LIFO die and to disallow the use of lower of cost or market. “These are important provisions, but they are not getting much press right now because we are in deflationary times.”

One more sleeper provision that Taub is concerned about is the possibility of requiring corporations to receive 1099 forms for work performed. Currently, corporations are excluded from this requirement. While he doesn’t think this will become law because it is too complicated to be workable, Taub sees the idea as revealing. He believes it shows the mindset of the government right now is to find ways to squeeze every possible dollar from corporations.

 
















Auditing Standard No. 7: PCAOB strengthens requirements for engagement quality review
February 4, 2010 - Last week, the Securities and Exchange Commission (SEC) approved a new standard proposed by the Public Company Accounting Oversight Board (PCAOB), Auditing Standard No. 7, Engagement Quality Review (AS 7). As a result, accounting firms performing audits and interim reviews of financial information for public companies should plan to commit more resources, including partner time, to engagement quality reviews for fiscal years beginning on or after December 15, 2009.

The Board generally agreed that new requirements were necessary to "focus reviewers on the need to perform a robust review, rather than on whether particular matters that had "come to [their] attention."

The Board said that it had proposed this standard, "after considering feedback from its Standing Advisory Group (SAG) as well as information from its inspection and enforcement programs." The Board was also charged by the Sarbanes-Oxley Act of 2004 to "provide a concurring or second partner review and approval of [each] audit report (and other related information), and concurring approval in its issuance."

Prior to the adoption of the new standard by the SEC, the Board had relied on an interim standard used by the accounting profession, commonly known as "Appendix E." for SECPS member firms.

Despite the PCAOB's statement at the release of AS 7 that the Board "has been sensitive to commenters' concerns and agrees that the EQR [engagement quality review] should not become, in effect, a second audit," it is clear that meeting the requirements in the more explicit language of the statement will increase the hours partners must devote to a quality review and in the case of large audits, the need for the participation of assistants as well. Accounting firms will be faced with higher costs for the quality review of audits as well as interim quality reviews. Engagement quality review procedures for interim financial information are similar to those for the audit.

Other practical implications of AS 7 for accounting firms include documentation issues and potential liability, according to an analysis by Schulte Ross and Zabel LLP, attorneys in Washington DC and New York.

The new standard focuses on the qualifications of the concurring review partner and lists nine specific tasks that the reviewer must perform, using language that is more explicit than the interim standard. AS 7 also calls for specific documentation of the quality review process.

Qualifications of engagement quality reviewer

Under the new standard the engagement quality reviewer must be associated with a registered public accounting firm and must be a partner or another individual in an equivalent position.

The standard specifically refers to competence. "The engagement quality reviewer must possess the level of knowledge and competence related to accounting, auditing, and financial reporting required to serve as the engagement partner on the engagement under review."

The reviewer must be independent of the company, conduct the review with integrity, and maintain objectivity.

EQR approval is appropriate only if, "after performing with professional due care the review required by this standard, [the EQR professional] is not aware of a significant engagement deficiency." The statement defines significant engagement deficiency.

Changes in language

The scope of the changes in engagement quality review procedures is evident in a comparison of the language of the interim statement and AS 7.

The interim statement says that the concurring partner reviewer's responsibility is fulfilled by performing the following procedures:

• Discussing significant accounting, auditing and financial reporting matters with the audit engagement partner;
• Discussing the audit engagement team's identification and audit of high-risk transactions and account balances;
• Reviewing documentation of the resolution of significant accounting, auditing and financial reporting matters, including documentation of consultation with firm personnel or resources external to the firm's organization (such as standard-setters,
• Reviewing a summary of unadjusted audit differences;
• Reading the financial statements and auditors' report; and
• Confirming with the audit engagement partner that there are no significant unresolved matters."

The language of AS 7 explicitly directs the engagement quality reviewer to evaluate risks to the firm and the company, evaluate the severity of deficiencies in control, and determine if there have been "appropriate" consultations on difficult matters. A final requirement calls upon the reviewer to, "Based on the procedures required by this standard, evaluate whether appropriate matters have been communicated, or identified for communication, to the audit committee, management, and other parties, such as regulatory bodies."

The nine procedures outlined in AS 7 say that the reviewer should:

a.   Evaluate engagement planning, including
- The consideration of the firm's recent engagement experience with the company and risks identified in connection with the firm's client acceptance and retention process,
- The consideration of the company's business, recent significant activities, and related financial reporting issues and risks, and
- The judgments made about materiality and the effect of those judgments on the engagement strategy.
b.   Evaluate the risk assessments and audit responses, including the identification of significant risks, including fraud risks, and the engagement procedures performed in response to significant risks.
c.   Review the engagement team's evaluation of the firm's independence in relation to the engagement.
d.   Evaluate judgments made about (1) the materiality and disposition of corrected and uncorrected identified misstatements and (2) the severity and disposition of identified control deficiencies.
e.   Determine if appropriate matters have been communicated, or identified for communication to the audit committee, management, and other parties, such as regulatory bodies.
f.    Review the financial statements, management's report on internal control, and the related engagement report.
g.   Read other information in documents containing the financial statements to be filed with the Securities and Exchange Commission ("SEC") and evaluate whether the engagement team has taken appropriate action with respect to any material inconsistencies with the financial statements or material misstatements of fact of which the engagement quality reviewer is aware.
h.   Based on the procedures required by this standard, evaluate whether appropriate consultations have taken place on difficult or contentious matters. Review the documentation, including conclusions, of such consultations.
i.    Based on the procedures required by this standard, evaluate whether appropriate matters have been communicated, or identified for communication, to the audit committee, management, and other parties, such as regulatory bodies.

Documentation requirements

Documentation of a quality review should provide information that identifies:

a.  The engagement quality reviewer, and others who assisted the reviewer,
b. The documents reviewed by the engagement quality reviewer, and others who assisted the reviewer,
c. The date the engagement quality reviewer provided concurring approval of issuance or, if no concurring approval of issuance was provided, the reasons for not providing the approval.

Documentation of an engagement quality review should be included in the engagement documentation.

The SEC, in its order approving the EQR standard, encouraged the PCAOB to issue guidance on the standard's documentation requirements. The PCAOB plans to publish Staff Questions and Answers on implementation of the standard in the near future.

 















Fortune reveals its Top 100 List; Big Four make the grade
February 3, 2010 - Fortune magazine has revealed its much-anticipated list of 100 Best Companies to Work for in 2010, with all Big Four accounting firms on the list, along with large regional accounting firm, Plante & Moran of Southfield, Mich., consulting firm Accenture and Intuit, maker of Quicken.

Fortune and the Great Place to Work Institute conducted extensive employee surveys and scored companies based on worker attitudes about management’s credibility, job satisfaction, camaraderie, pay and benefit programs, hiring, communication and diversity.

 
“The most important considerations for this year’s list were hiring and the ways in which companies are helping their employees weather the recession,” said Fortune Deputy Managing Editor Hank Gilman, in ExecDigital magazine. “All 100 companies on our list are currently hiring, many of them aggressively, leading to more than 96,000 open job positions expected in the next year.”

Cary, N.C-based SAS, the world’s largest privately owned software company, earned the top spot in the rankings this year after 13 years of working its way up the list. Its perks are so extraordinary, Fortune reports, that even Google used SAS as a model. A partial list of benefits includes two day-care centers, dry cleaning, massages, car detailing, a UPS depot, a book exchange, in-season tax preparers, an orthotics store, an Olympic pool, sauna….the list goes on.

Rankings of accounting-related companies:
44 – Ernst & Young
52 – Booz Allen Hamilton
66 – Plante & Moran
70 – Deloitte
71 – PricewaterhouseCoopers
84 – Accenture
88 – KPMG
94 – Intuit

Ernst & Young professionals enjoy benefits that include financial planners, generous time off, flexible work arrangements, back-up childcare, and college coaching for parents of children heading to college. The company added five new benefits this year. "We work hard to recruit, develop, and retain the best and the brightest," said Nancy Altobello, Americas vice chair of people, in a statement. "With that said, it's really the commitment of all of our people to our inclusive, team-oriented culture that makes Ernst & Young such a great place to work."

Plante & Moran, the 12th largest CPA and business advisory firm, has been on the list for 12 years. Managing Partner Gordon Krater said in a statement: “Considering the average life cycle for an organization on the list is three years, our recurring presence is evidence that our team has created a truly unique and extraordinary work environment.”

PricewaterhouseCoopers noted that during the past year, PwC, its partners and professionals donated more than $30 million to charitable organizations and spent more than 134,000 hours in community service. All U.S. partners and staff were given 10 additional hours of paid time off annually to volunteer for their personal causes and charities. "Even in tough times like these, responsible organizations continue to operate with an eye toward doing what's right for their business – as well as their communities – over the long term," said Bob Moritz, U.S. chairman and senior partner.

Accenture responded to the rankings by noting that the magazine highlighted the company’s Smart Work program, which is designed to reduce travel to client sites, and more than 45 telepresence locations where employees can hold virtual meetings with clients and colleagues around the world.

“People are our greatest asset, and attracting, nurturing and developing the best talent remains a top priority,” said LaMae Allen deJongh, Accenture’s managing director, U.S. human capital and diversity, in a statement. “We are honored to be recognized once again as a leading employer of choice—particularly as we continue to actively recruit for a variety of skills in the United States and around the world.”

















Google/Microsoft face off over cloud-based storage
February 3, 2010 -  A clash of the Titans is underway between Google and Microsoft, with both players lobbying to be your preferred provider of free online storage space and productivity applications. These are often referred to as being "in the cloud," or cloud-based computing. Cloud-based solutions free users from maintaining programs or backing up data, as the service is done for them automatically by the provider.

The cloud-based fray heated up recently when Google expanded the capabilities of its free Google Docs application. This is a free online productivity suite that allows users to edit and share word processing documents and spreadsheets. Previously users could only store documents created within Google Docs, but now any type of file, up to 250 MB in size, can be uploaded to Google Docs. Up to 1 GB of total space is available for free, and additional space is 25 cents per GB per year. Thus, 100 GB of online storage would cost $24.75 per year. Google Docs users can then use the Shared Folders feature to segregate and share portions of their online storage with other users. This provides an easy mechanism for allowing multiple users to share and update the same document without having to shuttle revisions around via e-mail.

Microsoft initially answered Google Docs with Office Live Workspace. This free application provides up to 5 GB of document storage online for free. Users can also create new Word, Excel, or PowerPoint documents on their desktop, but automatically save the documents online. Any type of document can be uploaded to an Office Live Workspace. Similar to Google's Shared Folders feature, Microsoft allows users to create folders known as workspaces that can be shared with others. Users can also create task, contact, or event lists that can be synchronized with Outlook. It's also possible to store free form notes or lists in a workspace.

Microsoft also offers another cloud-based solution, known as Skydrive. Users receive 25 GB of storage space for any type of file. Further, Skydrive users can utilize the beta version of Office 2010 Web Apps – lightweight versions of Excel, Word, PowerPoint, and OneNote. Office Web App documents can be saved online in a Skydrive account, or downloaded to a desktop. To use Office Web Apps in a Skydrive account, choose the New link within a document folder to view a list of document types.

This free storage arms race could eventually pose problems for online services like iBackup, Dropbox, and others that provide online storage space on a subscription basis. DropBox does offer 2 GB of free online storage, but charges monthly fees for additional space.




















Nine states and District of Columbia will file tax returns in new locations
February 3, 2010 -   The Internal Revenue Service has announced that some taxpayers who file paper income tax returns will send them to different processing centers this year.

Taxpayers in Maine, Maryland, Massachusetts, New Hampshire, Vermont, Virginia and the District of Columbia will now send their tax returns to the IRS Kansas City Service Center in Kansas City, MO. Taxpayers in Indiana and Michigan will send their tax returns to the IRS Fresno Service Center, in Fresno, CA. Taxpayers in Alabama will send their tax returns to the IRS Austin Service Center in Austin, TX.

For tax preparers and taxpayers filing paper tax returns for earlier years, IRS spokesman Anthony Burke told AccountingWEB that all prior year returns should be sent to the new mailing addresses for 2009 tax returns and not the addresses on the documentation supporting the prior year tax forms.

According to the IRS Web site, the Service continuously monitors work flow at its centers and makes appropriate adjustments by altering the volume of returns to be sent to each.

For taxpayers who file paper returns, the correct IRS service center addresses are on labels inside the tax packages they receive in the mail. Taxpayers who do not receive a package can refer to the online instructions for Form 1040, Form 1040A and Form 1040EZ.