Dec. 14, 2018
Are You Ready for the Financial Crisis of 2019?
(The New York Times) By Alex Williams, Dec. 10, 2018 – For moneyed Americans, most of the past year has felt like 1929 all over again — the fun, bathtub-gin-quaffing, rich-white-people-doing-the-Charleston early part of 1929, not the grim couple of months after the stock market crashed.
After a decade-long stock market party, which saw the stocks of the S. & P. 500 index create some $17 trillion in new wealth, the rich indulged in $1,210 cocktails at the Four Seasons hotel’s Ty Bar in New York, in $325,000 Rolls-Royce Cullinan sport-utility vehicles in S.U.V.-loving Houston and in nine-figure crash pads like Aaron Spelling’s 56,000-square-foot mansion in Los Angeles (currently on the market for $175 million, more than double what it fetched just five years ago).
Will it last? Who knows. But in recent months, the anxiety that we could be in for a replay of 1929 — or 1987, or 2000, or 2008 — has become palpable not just for the Aspen set, but for any American with a 401(k).
Overall, stocks are down 1.5 percent this year, after hitting dizzying heights in early October. Hedge funds are having their worst year since the 2008 crisis. And household debt recently hit another record high of $13.5 trillion — up $837 billion from the previous peak, which preceded the Great Recession.
After a decade of low interest rates that fueled a massive run-up in stocks, real estate and other assets, financial Cassandras are not hard to find. Paul Tudor Jones, the billionaire investor, recently posited that we are likely in a “global debt bubble,” and Jim Rogers, the influential fund manager and commentator, has forewarned of a crash that will be “the biggest in my lifetime” (he is 76).
What might prove the pinprick to the “everything bubble,” as doomers like to call it? Could be anything. Could be nothing. Only time will tell if the everything bubble is a bubble at all. But, just a decade after the last financial crisis, here are five popular doom-and-gloom scenarios.
5. Student Debt
Remember how the 2008 crisis was triggered by a bunch of people, who probably should not have been lent giant amounts of money in the first place, not making their mortgage payments? That was just the precipitating factor, but go back and stream “The Big Short” if none of this rings a bell.
Then fast-forward to 2018, where bad mortgages may not be the problem. Consider, instead, the mountain of student debt out there, which is basically a $1.5 trillion bet that a generation of underemployed young people will ever be able pay off a hundred grand in tuition loans in an economy where even hedge funders are getting creamed. Already, a lot of them aren’t paying and can’t pay. In a climate where “there are massive amounts of unaffordable loans being made to people who can’t pay them,” as Sheila Bair, the former head of the Federal Deposit Insurance Corporation, described the student debt problem in Barron’s earlier this year, nearly 20 percent of those loans are already delinquent or in default. That number could balloon to 40 percent by 2023, according to a report earlier this year by the Brookings Institution.
Now, lots of that debt is owed the federal government, so it’s unlikely to poison the banking system, as mortgages did a decade ago. But this burden of debt is already beginning to wipe out the next generation of home buyers and auto purchasers. As a result, a generation of well-educated and underemployed millennials, told to value a college education above all, could drag down an economy that never seemed to want them in the first place.
You know who has racked up even more debt than hopeful 20-something ceramics-studies grads in the United States? Here’s a hint: It’s a not-exactly-Communist country in Asia that has been on such a wild debt-fueled building spree that it somehow used more cement in just three years earlier this decade than the United States did in the entire 20th century. Think about that. Now think about it some more. Over the past decade, China devoted mountains of cash to build airports, factories and entire would-be cities — now known as “ghost” cities, since the cities are populated by largely empty skyscrapers and apartment towers — all in the name of economic growth. And grow it did.
The result is a country with a supersized population (1.4 billion people) and supersized debt. Where things go from here is anyone’s guess. Optimists might argue that those trillions bought a 21st-century Asian equivalent of the American dream. Pessimists describe that massive debt as a “mountain,” a “horror movie,” a “bomb” and a “treadmill to hell,” all in the same Bloomberg article. One thing seems certain, though: If the so-called “debt bomb” in China explodes, it’s likely to sprinkle the global economy with ash. And with President Trump teasing a trade war that already seems to be threatening China’s massive, export-based economy, we may have our answer soon.
3. The End of Easy Money
Say you lived in the suburbs, and one day your neighbor suddenly pulled up her driveway in a new $75,000 Cadillac Escalade. A week later, she was tugging a new speedboat. A few weeks after that, it was Jet Skis. You might either think, “Wow, she’s rolling in it,” or “Golly, she hates glaciers.” (Hatred of glaciers may prove, actually, to be the real spark of the financial end times.) But what if it turned out that she bought all of those carbon-dioxide-spewing toys on credit, at crazy-low interest rates? And what if those rates suddenly started to spike? The result would likely be good news for the polar ice caps and bad news for her, when the repo man (not to cave to gender stereotypes about repo-persons) came calling.
O.K., overstretched metaphor alert: The “neighbor” is us. Ever since the Federal Reserve started printing money in the name of “quantitative easing” to pull us out of the last financial crisis, money has been cheap, and seemingly any American with a pulse and a credit line has been able to fake “rich” by bingeing on all sorts of indulgences — real estate (despite tighter lending standards), fancy watches and awesome gaming systems, to say nothing of the debt that corporations were racking up, which some market analysts think might be the biggest threat of all.
The problem is: The whole system is now running in reverse. The Fed has been hiking rates and spooking markets in order to stave off inflation and other potential ills. Is this an overdue fit of fiscal sanity, or the equivalent of taking away the punch bowl just as the party was getting started, then dumping it on our heads?
There is at least one person at 1600 Pennsylvania Avenue who thinks this could all end badly. “The United States should not be penalized because we are doing so well,” Mr. Trump tweeted on July 20, just one of a series of broadsides against the current Fed policy, adding, “Debt coming due & we are raising rates - Really?”
I know, it’s a crazy thought: Imagine that a bunch of neighboring countries with wildly different languages, customs, values, and priorities somehow failed to get along? We don’t have to rewind 70-something years to the last Pan-European shooting war. Just witness the continuing problems in the European Union. Ever since Britain voted to leave the union in the Brexit referendum of 2016, Europeans have been engaged in a dark parlor game, speculating on who might be next. Might it be a “Frexit” spurred by nationalists in France? A “Nexit” stoked by the anti-immigrant far right in the Netherlands? Lately, the fears have focused on Italy, where an “Italexit” — or “Quitaly,” if you can’t help yourself — has been bandied about by populist politicians as they threaten to abandon the euro, or leave the European Union altogether, over an ongoing tiff with European neighbors over deficit spending, migration and whatever else drums up votes.
The turmoil has already sent ripples through global markets during the past year. In recent months, Italian populists are still making veiled threats to break up the coalition, and the official denials are not 100 percent reassuring. Following the latest budget squabble with Brussels, the Italian Prime Minister Giuseppe Conte told news reporters: “Read my lips: For Italy there is no chance, no way to get ‘Italexit.’ There is no way to get out of Europe, of the eurozone.” Was he aware that “read my lips” is American political shorthand for a “broken promise”?
1. An Anti-Billionaire Uprising Across America
It could happen. Just sayin’.
9 Client Conversations That Encourage Referrals
(AccountingWeb.com) By Bryce Sanders, December 3, 2018 – Your current clients know plenty of people. And, generally speaking, if they have money, they have problems. Addressing money and tax issues is your business, and the customers working with you are happy with you. It’s smart to take advantage of this network and ask them to refer business.
Asking for referrals is tricky on both sides. Some professionals are hesitant because they think it’s like asking for a favor, while others don’t see sending business as one of their customers’ responsibilities. On the client side, we live in a litigious society, and people might hesitate to be unwillingly involved in an issue if things don’t work out.
Fortunately, despite these concerns, it is still possible (not to mention wise), to tap into the network of people your clients know. Here are nine face-to-face conversations that can lead to referrals. It all starts with asking, “Who do you know….”
- Who also wants to learn about this subject? As the year draws to a close, your client suddenly has questions about how the tax law changes affect them personally. They call. You spend time with them, patiently aligning the changes to their individual situation. You suggest some steps to take before year end. They are happy campers.
Approach: You ask if any friends and colleagues are also confused about the new tax act. Do you think they would also like to learn how the changes affect them? Then, stop talking. Your client might volunteer a name or two. This could be a personal introduction over coffee or a visit to their office to meet colleagues.
- Who also has the same problem? A client comes to you with a problem unique to their business or personal tax situation. It came out of left field. They were worried. You patiently listened, then provided an action plan for how to move forward and address the issue. Your client is relieved. They are happy.
Approach: People in the same occupation or business usually know plenty of other individuals just like themselves. If they have this problem, there’s a good chance at least one other friend does too. You ask if they know any other people facing the same issue and say you would be glad to talk with them.
- Who is considering selling their business? For many small business owners, a large part of their wealth is tied up in their company. As they get older, many are looking for a way to cash out. They may have inflated ideas (or none at all) about the value. Succession planning is an issue if their children want to go in another direction. Giving their employees the opportunity to buy them out might be an option they never considered.
Approach: Ask the question. Your clients may have friends who want to retire but have no idea about valuing and selling their business. It’s not your customer’s field, so they can’t offer useful advice. Suddenly, you are a resource to help this person transition to the next stage of their life.
- Who is about to buy a business? Start a business? This is the mirror image of the above question. Buying an existing business makes sense, but how do you know if the asking price is realistic? They might be considering buying into a franchise operation. They might be tired of working for a big company and eager to set up on their own.
Approach: Ask. If your client knows someone about to take the plunge, that person probably has lots of questions. They need a fiduciary, someone who acts in their interest (and is paid for it). Introducing you means bringing them someone who can represent their interests and provide an honest appraisal.
- Who is new to the area? You have clients who are middle- to senior-level corporate executives. People in their office come and go because climbing the ladder often means relocating. There’s an urban legend that “IBM” stood for “I’ve been moved.” If they don’t know these folks at work, they might in their upscale neighborhood of executive homes.
Approach: Ask about new faces. Both the business section of the newspaper and business journals have “People on the Move” sections. Although some companies might provide personal accounting services as a perk, not all do. And when it comes to handling their money, many people prefer a face-to-face relationship.
- Who will be retiring in the next couple of years? Things are not what they used to be. Gone are the days when the salary stopped and the pension check filled the void. Now, for many people, there’s just the void. Personal retirement plans often allow for catch-up contributions, a useful feature for small business owners, but many people need professional advice concerning retirement and should get it a few years in advance.
Approach: Ask in the context of “Retirement’s changed. Many people are unprepared.” Your client should know someone, and if that person owns a small business, there may be a greater scope for offering advice vs. a salary earner. They need help.
- Whose accountant retired? One of the benefits of the accounting profession is the historically low client turnover rate. However, this sometimes means someone’s CPA retires before them or sells their practice and moves away. That individual might want to shop around, but inertia is powerful. This friend of your client isn’t happy.
Approach: If your client knows someone, ask for an introduction. You aren’t predatory, but you could listen to their concerns and advise them on their options. You aren’t stealing someone’s client (exactly) because the accountant they knew and liked is no longer in the picture.
- Who owns rental property? Real estate can be a seductive siren. The rental return often looks far better than fixed-income instruments. They heard someone once say: “Safe as houses.” They buy more and more. Suddenly, they have a portfolio.
Approach: Specific tax laws apply to rental property. You know about them, but does your client’s friend who has gradually become a landlord? If your customer hears their friend complain, they may feel an introduction is in this person’s best interest.
- Who is considering bankruptcy? This is last on the list because it’s grim. They amassed debts, then lost their source of income. They are behind on their taxes. The walls are closing in. Hopefully, your client doesn’t know someone who is dealing with this, but they might.
Approach: Tactfully ask. Try not to sound like a late-night TV commercial or drive-time radio ad. Explain it’s a complicated process. Assuming the following is true, let them know you’ve helped others and might be able to help their friend, too.
Requesting client referrals is a fantastic way to grow your business and can be tactfully handled, especially when the conversations take place face to face. Remember: You help people, and this is simply another method of figuring out who else needs assistance.
Top Workplace Trends for 2019
(CPA Practice Advisor) Dec. 5, 2018 – Looking back at the state of the labor market according to the monthly ADP National Employment Report and quarterly Workforce Vitality Report, the U.S. workforce experienced historic gains in 2018. Specifically, in 2018 the unemployment rate fell to a near 50-year low, more than two million jobs were added, and wage increases began to accelerate in 2018. Wages increased nearly an average of $1 per hour from last year, and the average wage increase for job switchers was 5.8 percent, while job holders also saw a 4.7 percent increase.
“With 2018 employment levels at an all-time high and broad-based wage growth taking root, the U.S. job market is more dynamic than ever,” said Don Weinstein, Chief Product and Technology Officer, ADP. “In 2019, employers and workers will increase their focus on issues ranging from the personalization of pay, to an increasing mosaic of workers that span fulltime to gig, data privacy issues, and more.”
Trends for 2019:
The Personalization of Pay
- With workers being able to personalize almost every aspect of their personal and professional lives, employers will need to adopt flexible options around pay schedules and provide financial wellness tools to employees.
- Digital accounts will become an increasingly common option for employees that allow access to pay how and when they want.
- The weekly, bi-weekly or monthly payroll cycle will evolve into schedules that meet the needs of each individual worker.
- Today, 86 percent employees are interested in using non-traditional financial tools to manage their pay. Tools that enable workers to manage and budget take-home pay, while automatically tracking spending and suggesting budgets, will help them meet their financial goals.
Ensuring Workforce Agility
- Employers will continue to shift to a mosaic of workers to meet business needs, increase their focus on employment engagement and embrace the importance of the team.
- As organizations become more agile, they will have a greater reliance on freelancers and contractors to help bridge the skills gap and scale effectively. Employers need to assess the right mix of freelancers (1099), temps and traditional fulltime workers (Form W-2) to best meet their increasingly on demand business objectives. As a result, employers will need to manage worker classifications in a more dynamic manner.
- Today’s workforce has more generations working than ever before. With Gen Z workers entering and Baby Boomers retiring from fulltime work, employers will need to limit “brain drain” and engage workers in new and creative ways.
- As employers struggle to retain and engage employees, many will change how they approach the annual performance review and opt to move to new performance-based model were the frequency of team leader check-ins is key to increasing engagement. In fact, data shows that associate engagement is 57 percent higher when a team leader frequently checks in with their team members.
- Organizations will increasingly demand HR systems that account for and manage where work gets done. Today, more than 82 percent of work gets done on teams. As teams organically form to address business needs, companies need to be able to track employee performance in a more matrixed environment. Systems need to track what team members do well, what they enjoy and foster ways to do more of it. Rather than focusing on developing weaknesses, models will shift to help workers discover their strengths and leverage them more at work.
Diversity and Inclusion
- Pressure for employers to deliver against diversity and inclusion initiatives will continue.
- The business case for diversity had an enormous spotlight placed on it in 2018. From the lack of women and minorities in leadership roles, to the challenges workers faced in reporting issues. Despite this attention, organizations still struggle to make progress in this critical area. According to findings from Rethinking Gender Pay Inequity in a More Transparent World, a study released by the ADP Research Institute, women are paid on average 17 percent ($13,640) less in base salary than men. However, when factoring in incentive pay, the total earnings pay gap widens to 19 percent ($18,500).
- In 2019, organizations will need to address the gender pay gaps by focusing on key metrics and diversity and inclusion initiatives that demonstrate progress in both pay and bonuses.
Democratization of Data
- Employers and employees will benefit from better access to deeper workplace insights.
- Providing business leaders with data that delivers meaningful and actionable workforce insights, as well improving industry competitiveness, will become the new norm. An increased focus will be placed on how easy it is for leaders to consume and put data into action. HR system will increasingly tap into artificial intelligence (AI) and machine learning (ML) to serve up insights in real time.
- Workers will also have more access to data through financial wellness and professional development tools that support their goals both inside and outside the workplace.
- Data privacy will continue to remain an industry and public focus with the EU General Data Protection Regulation (GDPR). Other countries and states will continue to look at privacy rights.
Digital Consumer-Grade Human Resources
- Employees and employees will continue to demand that the technology they use at work be as user friendly as what they use in their personal lives.
- This push will require HR solutions to be fully mobile enabled, cloud-based, open to APIs and designed with the end user in mind.
- HR technology and data will need to be accessed, shared and be able to be integrated across functions and bridge internal business silos.
What PCAOB inspectors Will Look for in 2019
(Journal of Accountancy) By Ken Dysiac, Dec. 7, 2018 – Systems of quality control, independence issues, and recurring deficiencies will be among the main areas of focus during PCAOB inspections of registered audit firms during 2019.
The PCAOB Division of Registration and Inspections staff on Thursday provided an outlook on the objectives and potential focus areas for its 2019 inspections of audits of issuers and brokers and dealers. The PCAOB suggested that auditors consider the information in the outlook when they plan and perform audits and review quality-control systems.
Key areas of focus for PCAOB inspectors, according to the document, will be:
- Systems of quality control. Inspectors plan to analyze how firms' systems promote a culture of audit quality and respond to risks; review aspects of quality-control processes that are critical to audit quality; and understand if firms perform procedures to evaluate whether the companies they audit have appropriate fraud controls.
- Independence. Inspectors plan to assess how firms maintain independence, in fact and appearance; educate professionals on independence requirements; monitor compliance with independence requirements; and assess the impact of non-audit services on independence.
- Recurring inspection deficiencies. Areas of repeated deficiency include auditing internal control over financial reporting; revenue recognition; allowance for loan losses; and accounting estimates, including fair value measurements. Inspectors plan to consider how firms identify the causes of deficiencies; the actions firms are taking to reduce these deficiencies; the actions they are taking to lead to higher audit quality in these areas; and how firms monitor the timing and progress of audit work.
- External considerations. Inspection procedures will include evaluating firms' responses to elevated risks of material misstatement due to external considerations such as economic conditions and assessing firms' evaluation of audit evidence that potentially contradicts management assertions.
- Cybersecurity risks. Inspectors will evaluate the audit procedures firms use to identify and determine whether cyber risks and breaches pose risks of material misstatement to companies' financial statements.
- Software audit tools. Inspectors will examine whether firms are applying due care and professional skepticism when using software audit tools.
- Digital assets. Inspectors will evaluate auditors' responses to risks associated with digital assets such as cryptocurrencies, initial coin offerings, and use of distributed ledger technology.
- Audit quality indicators. Inspectors plan to consider how firms may be using audit quality indicators to monitor their audit work and staff deployment, and whether firms are discussing audit quality indicator results with audit committees.
- Changes in the auditor's report. Inspectors will monitor firms' implementation activities with respect to the PCAOB's new auditor reporting standard, including pilot-testing and "dry runs" associated with firms' procedures for identifying and reporting "critical audit matters," which will be required to be reported for audits of large accelerated filers in audits for periods ending on or after June 30, 2019.
- Implementation of new accounting standards. Inspectors will continue monitoring changes in firms' processes and procedures in light of new accounting standards for revenue recognition, lease accounting, credit losses, and financial instrument accounting.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.