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February 9, 2018

Technologies Driving Remote Auditing

(CPA Practice Advisor) February 1, 2018 – On-site auditing has been the customary default since the dawn of accounting. It’s worked reasonably well, though time and cost considerations – both from the company and firm’s vantages – typically took secondary focus to successful audit completion, and healthy relationships maintained. It’s now possible to encapsulate all these objectives through remote auditing.
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How Will Tax Reform Affect the Cost of Capital?

(CFO) By Roger Grabowski, February 6, 2018 – The impact of the 2017 Tax Cuts and Jobs Act is really a story of two powerful competing forces: the increase in value that is brought about by the expectation of increased net cash flows, and the decrease in value that is brought about by potentially higher costs of capital. Before exploring the effects of the act on the cost of capital, it’s important to remember the components of the discounted cash flow valuation model.
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The Future of Work: How to Thrive Through IT’s Latest Revolution

(CIO) By Minda Zetlin, February 7, 2018 – Five years from now, your workplace will be completely unrecognizable compared to today. That’s an easy prediction to make, given how rapidly changing technology, markets and employment dynamics are reshaping organizations. But what will those differences actually look like? And which of today’s new technologies will have the biggest impact on the future?
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By 2020, Artificial Intelligence Will Touch Everything -- But How?

(Forbes) By Drew Bates, February 7, 2018 – Artificial Intelligence -- for lack of a better definition -- is where software acts human-like. Assuming we’re doing something right, and forgive our big-headedness, this sounds marvelous. The power of human intelligence in a predictable, non-chemically-burdened chassis which is always powered-on and free from other responsibilities or predilections. Follow this idea onwards through a few evolutions and the concept has perhaps too much potential. What if the intelligence-scale goes from zero to one hundred and we are simply not capable of handling the outcome? Thankfully, we’re at the comforting level where AI means sitting back and relaxing while stuff gets done better or easier without us having to put in so much effort.
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Cryptocurrencies Are Like Ponzi Schemes, World Bank Chief Says

(Bloomberg) February 7, 2018 – The head of the World Bank compared cryptocurrencies to “Ponzi schemes,” the latest financial voice to raise questions about the legitimacy of digital currencies such as Bitcoin. While cryptocurrency technology has the potential to reshape global finance, concerns have been raised about its volatility and the potential for money laundering or other crimes.
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Has U.S. Manufacturing Been Unleashed?

(Industry Week) February 2, 2018 – Tax reform is just one of a series of policy changes the Trump administration and the Republican-led Congress are seeking that business groups have lobbied for in recent years. The president has already started to push back against regulations. He is advocating a $1.5 trillion infrastructure investment which will begin to address America's aging roads, bridges and other transportation avenues. And he is calling for more "reciprocal" trade agreements that seek not simply to expand trade but to make trade more equitable. Given the direction of policy and a strengthening global economy, it's not surprising that manufacturers' optimism has soared.
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Time for a State and Local Tax Checkup

(AccountingWEB) February 7, 2018 – This busy season may be the perfect time to perform a state and local tax checkup for your clients. It’s probably the last thing you want to do right now, but given the current tax climate across the U.S., proactively advising clients about state and local tax matters should be a critical part of managing their tax exposure, as well as providing good customer service. Addressing the following three points will help you identify potential liabilities or mistakes and give you the opportunity to minimize or correct these issues before further damage can be done.
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Skills That Help Accounting Professionals Succeed Alongside AI

(Financial Management) January 29, 2018 – There’s some understandable concern these days about the possibility that increased use of artificial intelligence will lead to job losses amongst accounting and audit professionals. But Mike Baccala, PwC’s US assurance innovation leader, predicts that while accounting and auditing jobs may change as AI use becomes more prevalent, those jobs won’t go away.
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Are Your 2018 Benefit Changes Legally Effective?

(JDSupra) Walter Miller, February 7, 2018 – ERISA requires that benefit plans contain formal procedures for the adoption of amendments to the plan, including the underlying benefit programs. However, many employers routinely implement annual changes to their health and welfare benefit programs simply through the reissuance of benefit booklets without adhering to formal amendment procedures. A recent lawsuit brought by the Department of Labor against Macy's underscores the consequences of bypassing the ERISA amendment rule.
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Can Another Digital Demand Crush Be Avoided?

(Financial Planning) February 7, 2018 – With digital operational problems having hobbled a number of wealth management firms during the height of the Feb. 5 market downturn, executives gathered at the T3 Advisor Conference asked aloud if the entire industry was in need of a technology overhaul.
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Technologies Driving Remote Auditing

(CPA Practice Advisor) February 1, 2018 – On-site auditing has been the customary default since the dawn of accounting. It’s worked reasonably well, though time and cost considerations – both from the company and firm’s vantages – typically took secondary focus to successful audit completion, and healthy relationships maintained. It’s now possible to encapsulate all these objectives through remote auditing.

Technologies in document management and automated access are driving remote auditing abilities. Through enterprise content management (ECM), offsite mobile access to source documentation from throughout organizations is enabled, automating the way. The cost and capability has been simplified to encompass SMB’s, large companies and Accounting firms alike. The flow has become effectively simple: a company provides their auditing firm an ECM user account, with permissions set for what information the auditor may see.

All related transactional documentation is available per project on-demand, providing a central repository for convenient search based on any criteria, enabling the auditor centralized access from decentralized locations. This accomplishment begins with the company capturing all transactional documentation via the ECM’s automation tools, managing Accounting’s collection of documents pertaining to each vendor and transaction, and organizing them contiguously. Once input, the information is validated through the company’s ECM-ERP integration, with the accurate data archived in the ECM system.

A back-end advantage is the ECM’s business intelligence/analytics component. This enables the company to monitor the auditor’s activities and progress, providing guidance as needed. The system will generate reporting useful to both auditor and client company, based on any data points imaginable (literally). Both internal and independent auditors can report on key data sets, relaying useful findings in formats permission-accessible for review by management, advisor, financier and investor audiences in formats they prefer. Providing additional customization, scalable dashboards deliver convenient self-service analytics reporting for each audit, visualizing data intuitively with drop-and-drag simplicity.

Functionally, remote auditing’s merits are rooted in an Accounting firm’s staff’s ability to audit from any location, even multiple locations simultaneously. Auditors can work from anywhere on the planet, collaborating with fellow team members and company representatives simultaneously. This flexibility benefits many firm’s geo-diverse structures, with client companies advantaged from expeditious project completions and relates cost savings (notably reduced audit fees, fewer company personnel hours consumed, less communal space occupied). The company staff’s time sourcing documentation from on- and off-site storage is eliminated, with all relevant information readily available to auditors through the ECM portal, facilitating a prominent cost-saver for all entities involved.

On-site meetings will continue to occur, though typically less frequently, and will be much better organized for to-the-point collaborations facilitating quicker collaborative resolutions. The company-firm relationship will remain strong, perhaps even improve with this efficiency. The beneficial face time will be maintained; personal proximity is the human element both warranted and appreciated, providing the understanding and leading to agreements, enhancing these interactions constructively. Additionally, auditors are freed from long stints as a company’s on-site guests – something all parties admittedly appreciate. There is such a thing as too much togetherness…

The economies of remote auditing are realized around cost flexibility. Auditors will incur fewer expenditures per remote audit (travel expenses avoided, billable hours more efficiently managed). This provides them cost effective service delivery. With it comes the opportunistic prevision options allowing the firm latitude regarding their pricing model. This is particularly advantageous in ever-present competitive environments; remote auditing provides the opportunity to share these savings with the company, while maintaining their profitability goals. Companies ultimately avoid audit projects exceeding projected timetables and budgets. All parties remain satisfied in their fiscal relationship.

Remote auditing is an option of advantage for all involved. ECM provides the platform to keep it convenient and cost effective.

 

 

 

 

How Will Tax Reform Affect the Cost of Capital?

(CFO) By Roger Grabowski, February 6, 2018 – The impact of the 2017 Tax Cuts and Jobs Act is really a story of two powerful competing forces: the increase in value that is brought about by the expectation of increased net cash flows, and the decrease in value that is brought about by potentially higher costs of capital.

Before exploring the effects of the act on the cost of capital, it’s important to remember the components of the discounted cash flow (DCF) valuation model.

DCF value is a function of expected future net cash flows (the numerator) and present- value factors (the denominator) which are a function of the estimated cost of capital or the discount rate.

The act will generally increase the available net cash flows for businesses, increasing the numerator in a DCF model and thus leading to greater value. The recent run-up in stock prices (preceding their more recent crash) was generally driven by the expectation that net cash flows will increase, allowing for increased return of profits to shareholders (in the form of increased dividends and stock buybacks).

But the impact on the cost of capital is more complicated.

The cost of equity capital, in its simplest form, is typically expressed as a function of the risk-free rate, a market risk factor known as “beta”, and the equity risk premium, which is the equity return that investors demand to compensate them for investing in a diversified portfolio of large common stocks rather than investing in risk-free securities.

The Federal Reserve has started implementing what the financial press have coined “QExit,” a reduction in the Fed’s massive holdings of mortgage-backed securities and U.S. Treasury debt. Those holdings were designed to keep long-term interest rates down, thereby holding down the cost of equity capital. Now the Fed has determined that the economy is strong enough for interest rates to return to more normal levels, which will progressively lead to an increase in the cost of equity.

Beta risk is a function of business risk and financing risk. To the extent that business investment is financed by debt capital, beta risk increases. But that risk is partially mitigated by the tax deductibility of interest expense, reducing the true cost of interest expense. The act will increase the true interest cost by reducing the income tax savings due to the deduction of interest expense in calculating taxable income.

For example, assume a business has $10 million in interest expense. At a 37% income tax rate, the true cost of debt capital is $10 million x (1 – 37%) = $6.3 million. But at a 21% income tax rate, the true cost of interest is $10 million x (1 – 21%) = $7.9 million, increasing the true cost of debt capital by 25% and increasing the financial portion of beta risk.

However, one also needs to consider that a business may have some portion of their operations and profits earned in countries outside of the United States. That makes it important to consider all the relevant taxing jurisdictions in assessing a company’s global effective tax rate and consequent interest tax shield.

Finally, the weighted average or overall cost of capital to the business is a function of both the cost of equity capital and the cost of debt capital based on their proportionate amounts in the capital structure.

We’ve already seen that the combined actions of the Fed and Congress in enacting the new tax law will likely increase components of the cost of equity capital and increase the true cost of debt capital.

A newly-introduced provision will further reduce the value of interest tax shields, thereby further increasing the after-tax cost of debt. The act caps the ability by corporations to deduct interest expense above certain thresholds.

For businesses with revenues of more than $25 million, the interest deduction for years 2018 through 2021 is capped at 30% of “adjusted taxable income,” which is similar to earnings before interest expense, income taxes, depreciation, and amortization (EBITDA).

Thereafter the interest deduction is capped at 30% of “adjusted taxable income,” whose definition then switches to a measure similar to earnings before interest and income taxes (EBIT). These limitations will cause the cost of debt capital financing to increase even more.

Thus, for many larger businesses that have grown accustomed to relying on debt capital financing, their weighted average cost of capital will likely increase as result of The act.

These relationships, reflecting the tax act’s impact on beta risk and on the cost of debt capital, are becoming increasingly complex, affecting the ability to correctly estimate the cost of capital. Applying old formulas mechanically will likely prove unreliable as we move forward in this new tax regime.

 

 

 

 

 

The Future of Work: How to Thrive Through IT’s Latest Revolution

(CIO) By Minda Zetlin, February 7, 2018 – Five years from now, your workplace will be completely unrecognizable compared to today. That’s an easy prediction to make, given how rapidly changing technology, markets and employment dynamics are reshaping organizations. But what will those differences actually look like? And which of today’s new technologies will have the biggest impact on the future?

“Technology is going to change the workforce,” says David Burns, senior vice president and CIO of manufacturing and supply chain at GE. “As IT professionals, we need to figure out how to apply that technology to make people’s lives more efficient and manage changing demographics and changes within our industries.”

Here are some of the biggest changes Burns and other experts foresee.

1. Skills will matter less than the ability to learn new ones

According to Oxford University research, the “half-life” of a job skill dropped from 30 years to 5 years between 1984 and 2014 — and it’s continued dropping since. In the future, the most valuable employees in IT (and elsewhere) will not be those who’ve spent years acquiring complex skills such as data analysis or software development. They will be those who are willing and eager to constantly retrain throughout their careers so they always have the skills your organization needs most.

Kim Smith, venture strategist and chief innovation officer at IBM, likens such employees to the early NASA employees portrayed in the movie Hidden Figures. Back then, “computer” was a job title, not a piece of office equipment, and it was the job held by the movie’s central characters. Then NASA acquired a mainframe capable of replacing a building full of human computers “so they taught themselves Fortran,” Smith says.

To be successful in the future, your company must support, encourage and enable lifelong retooling. At IBM, it means giving people access to training and allowing them to rotate in and out of jobs and departments, she explains. “They can be in one role for a period of time, then go to something completely different.”

“I think expectations are going to morph,” Burns adds. “Tech professionals need to be more forward thinking. A lot of the ones I’ve seen were order takers, and we have to get away from that world. We have to help disrupt industries rather than letting our organizations be disrupted.” To make that happen, he says, “You’re going to see functional experts getting more technically savvy and IT experts become more functionally savvy.”

It will also mean making some tough decisions when faced with employees who can’t or won’t learn new skills or adapt to changing needs. “You can have someone who’s top-tier and technically capable,” Smith says. “But if they’re entrenched and inflexible and their EQ [emotional intelligence quotient] is not wired to be OK with change and failure, that one individual can be toxic to the organization as a whole.”

2. Artificial intelligence and automation will change most jobs

According to PwC research, 38 percent of U.S. jobs could be performed by automation within the next 15 years. Tech executives report that robotic process automation (in which software is deployed to perform repetitive tasks) could affect millions of jobs right now.

“Forty-five percent of present-day activities could be automated using technology we already have,” Smith says. “That could affect at least 100 million knowledge workers by 2025. So for those organizations that are really dependent on repetitive processes, where are they going to capture efficiency gains to stay competitive? And how will they retrain their people to take on other skills and capabilities?”

Beyond automation, artificial intelligence and machine learning (in which computers using algorithms combined with large data sets learn to make decisions faster and sometimes better than humans can) will remake workplaces as we know them. It might happen sooner than you think. “AI has been on everyone’s horizon for a while. But in our world view, 2018 will be the first year that it gets real,” says Pat Ryan, chief architect for technology consulting firm SPR in Chicago. “We are looking at client companies who actually want to do something with it.”

“Radiologists are not reading all the images they used to,” says William Tanenbaum, co-head of the technology transactions practice at New York law firm Arent Fox. “AI can read an x-ray better than a doctor, or at least read it for 77 hours without rest, and can allow the doctor to do better things faster.”

He and other experts insist that the advent of AI in the workplace will change jobs — making them more enjoyable — rather than eliminate them. Ryan, for instance, suggests the term “artificial intelligence” should be replaced by “augmented intelligence” because that’s what AI will do — augment the capabilities of knowledge workers.

“What does an exponential IT worker look like?” asks Jeff Schwartz, human capital principal at Deloitte Consulting. “What part of her work is problem solving? How much is routine? What communication is required in her job? What supervision is required?” If she oversees several people, consider what that oversight might entail, he says. “Is it scheduling a bunch of people, which could be done by algorithm, or is it people talking and seeing and interacting with each other?” With automation, the scheduling function could be handled by a chatbot. Our hypothetical IT employee might still hold a daily meeting with her team, but now they could spend that time solving work problems or discussing priorities.

“I look at it and say there’s an opportunity to boost productivity,” Burns says. “In general, I don’t think people like doing mundane tasks. They genuinely want to focus on adding value and these machines help them add more value than they could on their own.”

One way AI can add a lot of value, he says, is by helping humans figure out where to focus their attention. “The amount of information available in the workplace is growing faster than people can manage and they feel overwhelmed. Some artificial intelligence and machine learning technologies will help cut through the clutter.”

3. Your future workforce will be very different from today’s

One obvious force driving the adoption of AI and automation is the current tight market for skilled labor, especially when it comes to sought-after tech skills such as data analytics. But Schwartz believes that companies currently struggling to hire talent are struggling because of entrenched ideas about what employment is and isn’t.

“Maybe there’s a talent crunch and maybe there’s not,” he says. “Maybe the talent crunch is the result of looking for expertise in our backyards and in our own offices. Companies are looking to hire people to work in their buildings in the same way they’ve worked before.”

Instead, he says, employers need to broaden their view of what their workforce is. Deloitte predicts that the workforce of the future will be made up of employees working side by side with contractors, and with AI and automation. Increasingly, employers will crowdsource work as part of the mix, Schwartz says.

How will that work? “There are significant R&D projects where they’re using competitions,” Schwartz says. One of the most famous of these was the Netflix Prize in 2009. Netflix offered a $1 million prize to anyone who could make a 10 percent or better improvement to its software that recommended movies and TV shows to users based on their ratings of content they’d watched. The winning team, dubbed Bellkor’s Pragmatic Chaos, managed a 10.6 percent improvement.

Since then, other companies have used similar competitions to solve difficult technical problems. In 2013, for instance, GE used a similar approach to find a lighter way to fasten airplane wings onto airplanes. “For a reasonable amount of money, you can get a lot of people around the world to solve your problem,” Schwartz says. “Our sense is that you can use the crowd for almost any kind of work. You can ‘pixelate’ the work into very small pieces and get the crowd to work on different pieces.”

One advantage: Crowdsourcing gives you access to a much larger cohort of skilled workers than your company could ever hire. “Most of the best programmers in the world don’t work for you,” Schwartz says. “And there’s a significant number who don’t want to work for anybody. So I think this is a really interesting perspective.”

4. Quantum computing will redefine productivity

Asked which emerging technologies would make the biggest difference to the future workplace, several experts pointed to quantum computing. Traditional silicon chip-based computers work in binary code where every value is either zero or one. Quantum computing allows for a third state combining zero and one, meaning that quantum computers are dramatically more powerful than the computers we have today.

Last year, researchers at the University of Michigan sent electrons through a semiconductor using ultrafast laser pulses. It was a first step toward creating computers thousands of times faster than today’s. “We are probably at least two or three years away from significant adoption, just because using small light pulses is really difficult, and the cost is not insignificant,” says Ragu Gurumurthy, chief digital officer and chief innovation officer at Deloitte.

But when quantum computing does arrive in your workplace, expect it to make a big difference. “At the most basic level, the entire network and internet can be a lot safer with quantum computers,” Gurumurthy says. “Cyber security is enhanced exponentially.”

Secondly, he says, “There are a lot of problems today that we don’t have enough compute power to solve fast enough in terms of modeling.”

Most importantly, quantum computing can drastically decrease power requirements for enterprise-level computing. “When one thinks about the operational cost of a data center or switching center, power is a big component of that cost,” he says. “How do you architect a data center to bring that cost down?”

It’s a concern that goes beyond cost. Last year, the Semiconductor Industry Association published a report predicting that if traditional computing continues its current growth, by 2040, we will no longer be able to generate enough power to run the world’s computers. Because it’s not bound by the physics that demand a minimum amount of power to run a traditional computer, quantum computing is a potential solution to that problem.

5. You can never stop studying

As an IT leader, you must constantly keep learning about the technologies most likely to benefit your organization — or your competitors — in the future, experts said. For example, consider augmented reality and virtual reality, already in use for training and diagnostic purposes — technologies you may need to watch closely in the coming years. “I was surprised at how augmented reality and virtual reality have evolved in the last 12 months,” Gurumurthy says. “I once would have said they would only be useful for gamers, but these technologies will have an impact on the workplace in the next five years.”

“It’s important to spend time looking on the periphery at some of the new stuff coming,” Burns adds. “You need the ability to look beyond the day-to-day work you have to do. It’s far better to spend 5 percent of your time looking to the future than 100 percent of your time dealing with what’s in your inbox.”

In an uncertain world, it’s important to keep as many options open as you can. “Some of these emerging technologies seem like they’re far away,” he says. “But they’ll be here before you know it.”

 

 

 

 

 

By 2020, Artificial Intelligence Will Touch Everything -- But How?

(Forbes) By Drew Bates, February 7, 2018 – We are all equipped with the best minds in the known universe. Between ourselves and our predecessors, humans have created virtually everything we touch. We achieved this using a tool which represents the absolute pinnacle of intelligence; our brain.

This is not hyperbole. On an intelligence-scale of zero to one, despite our individual variety, we all fit within the microscopically small space occupied by the right-edge of the ‘e’. We’re up there alone, magnitudes away from the also-rans we share this planet with.

Now we’re having a concerted stab at creating computer programs which are as intelligent as we are. Artificial Intelligence (AI) --for lack of a better definition-- is where software acts human-like. Assuming we’re doing something right, and forgive our big-headedness, this sounds marvelous. The power of human intelligence in a predictable, non-chemically-burdened chassis which is always powered-on and free from other responsibilities or predilections.

Follow this idea onwards through a few evolutions and the concept has perhaps too much potential. What if the intelligence-scale goes from zero to one hundred and we are simply not capable of handling the outcome?

Thankfully, we’re at the comforting level where AI means sitting back and relaxing while stuff gets done better or easier without us having to put in so much effort.

What we recognize as AI is most of the time a shortcut through processes to reach a conclusion faster or more productively. By 2020 more or less everything will be touched by AI. Truth is, this comes down to a handful of activities:

Automation

There are not suddenly new things to do. AI just helps us to transition between discrete actions.

It means we can couple workflows together faster like ordering more toilet roll when it runs low or translating a Chinese message into English. Since computers began we’ve been used to them handling our actions based on our rules (every app has a settings page). Dialing this up into AI involves removing the rules and training a computer algorithm to link up the actions.

Prediction

There did not become more variables in the world to work with. AI just helps us to process all the variables in a very programmatic way with a transparent level of confidence.

It may be controversial but guessing what will happen in the future is most accurate when performed within the scientific realm of statistics. Since day one computers have excelled in math and we have almost entirely handed over this responsibility to them. Calculating statistical significance is the building block of machine learning, whether that is assessing weather patterns, detecting diseases or playing chess. We are on a continuous journey of increased data and processing power which make computers better.

Decision

We have not been making all the wrong decisions. AI just helps us be presented with the available options based on more data and with less instinct than we are accustomed to.

Assessing situations without perfect information is not just a human trait but a daily necessity and something we may not realize is constantly happening. From negotiations to ranking new business opportunities we make informed decisions towards our desired outcomes. Moving the needle upwards involves being furnished with more relevant details from more relevant sources.

Interaction

There are not undiscovered ethereal ways to interact with computers. AI just opens new interface methods with less effort.

Since the mouse and keyboard, we have been on a journey to use computers with less hurdles. Learning to type is something we have all needed to achieve for the exclusive task of programming computers and digitally communicating with each other. Now with code to process human sentences and interpret input from cameras and sensors, we can make this interaction as natural as with each other.

The significance of AI

Yet, given these down to earth realities, AI is still a huge deal. We are right now in a world where things get done faster, with more accuracy, based on better knowledge and with increased ease. Statista made a very poignant chart of how smartphone users benefit from artificial intelligence. In short, everything we do is touched in some way by AI.

So, if AI is becoming more and more ingrained into our lives, when do we get close to the machines taking over?

Impact to humans

Gartner may have calculated that by 2020 AI will create 2.3 million jobs while eliminating 1.8 million but this is not destined to last. As we’ve progressed through the last three industrial revolutions on the way to the digital revolution our working lives have fundamentally changed and they will again. Imagine a world where the work-life balance is two days of ‘work’ and five days of ‘life’. It’s quite likely.

Where I stand is that the alarm bells will ring when we morally question turning off a simulation because it has become too intelligent to be considered just code. This is still very firmly in the realm of science fiction. If the evolution of computing power is due to reach Zetta-scale (considered the minimum for human brain simulation) by 2030, at least we will have the hardware capability to make it happen. Right now, we’re firmly at the lizard/mouse stage.

In their AI Open Letter, many of the world’s greatest minds including Stephen Hawking, Mustafa Suleyman, Steve Wozniak and Elon Musk have made their pledge to ring the alarm before the power of AI is taken out of our grasp.

Where you stand is up to you. I’ll leave it with a quote from one of the world’s finest science fiction writers, the late Iain Banks: “We provide the machines with an end, and they provide us with the means.”

 

 

 

 

 

Cryptocurrencies Are Like Ponzi Schemes, World Bank Chief Says

(Bloomberg) February 7, 2018 – The head of the World Bank compared cryptocurrencies to “Ponzi schemes,” the latest financial voice to raise questions about the legitimacy of digital currencies such as Bitcoin.

“In terms of using Bitcoin or some of the cryptocurrencies, we are also looking at it, but I’m told the vast majority of cryptocurrencies are basically Ponzi schemes,” World Bank Group President Jim Yong Kim said Wednesday at an event in Washington. “It’s still not really clear how it’s going to work.”

The development lender is “looking really carefully” at blockchain technology, a platform that uses so-called distributed ledgers to allow digital assets to be traded securely. There’s hope the technology could be used in developing countries to “follow the money more effectively” and reduce corruption, Kim said.

The value of cryptocurrencies soared in 2017 before slumping, with Bitcoin losing nearly two-thirds of its value since mid-December.

While cryptocurrency technology has the potential to reshape global finance, concerns have been raised about its volatility and the potential for money laundering or other crimes.

In a speech this week, Bank of International Settlements chief Agustin Carstens said there’s a “strong case” for authorities to rein in digital currencies because their links to the established financial system could cause disruptions. Federal Reserve Chair Jerome Powell has said that “governance and risk management will be critical” for cryptocurrencies.

 

 

 

 

 

Has U.S. Manufacturing Been Unleashed?

(Industry Week) February 2, 2018 – "This legislation represents historic progress for manufacturers and for all Americans," Jay Timmons, president and CEO of the National Association of Manufacturers, said in response to passage of the tax reform bill, which lowered the U.S. corporate tax rate from 35% to 21%. With the new bill, Timmons promised, manufacturers will "increase capital spending, expand their businesses and hire more workers…" -- and "nearly half will increase employee wages and benefits."

Tax reform is just one of a series of policy changes the Trump administration and the Republican-led Congress are seeking that business groups have lobbied for in recent years. The president has already started to push back against regulations. He is advocating a $1.5 trillion infrastructure investment which will begin to address America's aging roads, bridges and other transportation avenues. And he is calling for more "reciprocal" trade agreements that seek not simply to expand trade but to make trade more equitable.

Given the direction of policy and a strengthening global economy, it's not surprising that manufacturers' optimism has soared. In the NAM Manufacturers' Outlook Survey Fourth Quarter 2017, 94.6% of respondents said they were optimistic about their own company's prospects and a solid majority (58.7%) said the U.S. was headed in the right direction. With these changes, is the long-sought U.S. manufacturing renaissance about to blossom? Manufacturing experts IndustryWeek interviewed say we're not quite there yet.

"There is reason for optimism but by no means are we back to what anybody would call an historic norm for manufacturing growth," said Cliff Waldman, chief economist at the MAPI Foundation. Between 2013 and 2016, he noted, the manufacturing sector was "almost stagnant" at about 0.5% growth on average. In 2017, it grew to 1.3%. But Waldman noted that even during the 2000s, not a great period for U.S. manufacturing, "we were seeing 2.5%, 3% at times." So far, he says, it is "a very modest improvement."

For 2018, Waldman is forecasting that manufacturing will "plod forward" at 1.5% to 2.0% growth. That's not to say he doesn't see good signs for the sector, one of which is a recent uptick in capital spending. Waldman said the U.S. has suffered for years from weak productivity growth and an underlying cause of that was the failure to invest in new technology and machinery.

"Capital spending is the way that productivity-generating innovation is spread throughout the supply chain," Waldman said.

Tax reform means that there will be less reason to move manufacturing offshore, says Willy Shih, a manufacturing expert and professor at Harvard Business School. He believes lowered tax rates will have "a bigger impact than a lot of people realize," but he cautions that decisions to build new plants in the U.S. or reshore operations won't materialize overnight. Shih also said that a decision to bring more manufacturing here does not equate to returning manufacturing sites to their former state.

"Any time you move work you always revisit the level of automation and how to improve it, so I think more automation is coming," said Shih. He pointed to a variety of technologies such as simulation software and machine learning that will help companies improve the efficiency of their operations and help the move toward mass customization. At the heart of much of Industry 4.0, he said, is the move away from build-to-stock and toward build-to-order.

Better information and analytics will continue to fuel the reshaping of manufacturing, says Nick Foy, chief strategy officer at ModusLink, a provider of supply chain and logistics services. "Big data will be a driving factor throughout the year, driven by an expansion outside of the retail market which allows for more collaboration across the supply chain. Big data will have the most impact on B2B sales, which will allow it to reach further into the supply chain towards raw materials suppliers and intermediaries, ultimately allowing for faster movement of information, leading to better decision making."

Like Shih, Foy also expects manufacturers to deal with decreasing order sizes. "This continued shrinking of order sizes will allow brands to reduce inventory of finished goods, a move led by the increased prominence of postponement and near-shoring, though it will likely have the opposite 'bullwhip effect' on inventory of raw materials."

Coming Home?

Recent moves on taxes and regulation may start a pickup in reshoring, but the business and government leaders will have to overcome decades of uncertainty about manufacturing's role in America.

"The truth is, the ingredients have been in place for several years, and we still haven't seen the promised renaissance in American manufacturing," says Josh Green, co-founder and CEO of Panjiva, a big data company that analyzes global supply chains. "What's missing? Conviction on the part of executives making buying decisions that America will be a center of manufacturing in the decades to come -- and is therefore a country where they should focus their attention. Generating this kind of conviction will require a clearer definition of the specific types of manufacturing where America has a unique and enduring advantage relative to other countries around the world, as well as sustained private and public investments in the people, places, and companies that are involved in these types of manufacturing."

Manufacturers are exploring their options on manufacturing location and supply chain structures as uncertainty about trade policies rises, says Jeff McKinney, a managing director at Accenture Strategy. One issue they are examining is finding ways to bring back production to the U.S. and take advantage of consumers' preference for Made-in-America products while still keeping costs in line. He said companies are looking at a "segmented" approach to this. Rather than bring all their production to the U.S., they will bring specific products. So an apparel manufacturer, for example, may bring its high-end lines to the U.S. but continue to make clothing basics overseas.

McKinney noted that the labor cost differential between Mexico and the U.S. is still substantial. He said for a production worker in the U.S., the average labor charge is $26 to $28 an hour versus $4 to $6 in Mexico. In order to make a move to the U.S., he said, two significant cost factors to consider are the facility's footprint and automation. He said facilities can be smaller because of improved automation. A smaller factory also results in reducing labor costs and other costs such as MRO.

As for automation, McKinney says Accenture considers a dozen technologies when working with clients to determine the feasibility of reshoring. They may include mobility technology to enable a more real-time view of operations, analytics to keep machines running more effectively or advanced packaging machinery. At this point, he says, automation is not resulting in the "wholesale replacement of headcount" but is being applied tactically to "pockets" in a factory. For example, a Midwest manufacturer he works with has put in automated cells for a production process that had been conducted manually and required five to six people. Now those cells can be operated by one person.

After visiting six manufacturing plants in Illinois and the Carolinas the week we spoke to him, Jeff Owens, the CEO of Advanced Technology Services (ATS), said he found "a real energy that's building in manufacturing." But Owens said the "good problem" facing manufacturers is finding people to staff their plants after years of little or no hiring. Even as manufacturing employment increased by 196,000 in 2017, the industry faces massive dislocation as baby boomers retire and manufacturers compete with other industries for tech-savvy recruits.

ATS is not immune to this need for people. Owens said the company has been working for several years on the "people side of maintenance" through conducting "robust" recruiting, pursuing former military personnel and establishing "a lot of technical training."

ATS has also found a business opportunity in this tightening labor market. While most of its business involves long-term contracts, the company established in 2015 eFactory Services to help manufacturers who need short-term help. ATS helps with a variety of issues such as preventive/predictive maintenance services, repairable parts management, critical spares planning, supplemental maintenance and even consulting on continuous improvement projects. "Maybe it's a little more expensive, but there's no long-term commitment and people really like that," Owens observed.

More to Do

If business groups such as NAM and the U.S. Chamber of Commerce are celebrating victories on taxes and regulations, they also insist that more must be done to help their members. Trade may be the area where there is the most uncertainty and disagreement with the Trump administration.

"As the administration has pulled back on trade agreements, governments around the world have rushed forward to fill the void. The EU is striking major deals with Canada, Japan and Mexico. And the Trans-Pacific Partnership is now moving forward without U.S. involvement," U.S. Chamber President Tom Donohue noted in his 2018 State of American Business address. "This is a reminder that we are in a global competition to sell to the 95% of the world's population that lives outside of the U.S. -- and that competition goes on with or without us."

While agreeing with the push to modernize NAFTA, Donohue warned that "withdrawing from NAFTA would be a grave mistake."

Harvard's Shih points out that in the automotive sector, domestic manufacturers have moved away from vertical integration to complex supply chains with specialized suppliers. Parts move freely across the U.S. borders from Canada and Mexico. If NAFTA negotiations result in barriers to the flow of those parts, he warns, "all of a sudden you're going to cause chaos in the supply chain."

Even more challenging will be how the Trump administration handles China. Trade with China in 2017 accounted for 53% of the U.S. trade deficit, according to the latest government figure. U.S. companies still benefit from lower manufacturing costs in China, thought that differential is narrowing. And American consumers pay less for goods produced there. But trade hawks such as Scott Paul, president of the Alliance for American Manufacturing, say the U.S. has paid a huge price in American jobs for this unequal trade and the administration needs to act, not just complain about Chinese practices.

"China has yet to make a meaningful concession on its state-led mercantilism, despite two meetings between presidents Trump and Xi," Paul said after the state of the union address. "This speech won't change China's behavior and defend American jobs. Only action will. It's time for the president's policies and actions to match his talk."

Manufacturing leaders also support the Trump administration's promise to take on infrastructure. In his SOTU speech, Trump called for a $1.5 trillion effort to "build gleaming new roads, bridges, highways, railways, and waterways across our land."

AEM President Dennis Slater, who represents more than 950 manufacturers of construction, agricultural and other equipment, applauds the call for action on infrastructure. However, he said his members "want details from President Trump about his infrastructure plan, and when our industry can expect legislation to make that plan a reality."

Indeed, the details of trade deals, infrastructure, workforce training and other challenges for manufacturing lie ahead. But while the Trump team may have low marks from the U.S. electorate as a whole, many manufacturing leaders believe the president is on their side and hope he fulfills his promise to have companies and jobs "coming back."

 

 

 

 

 

Time for a State and Local Tax Checkup

(AccountingWEB) February 7, 2018 – This busy season may be the perfect time to perform a state and local tax checkup for your clients.

I know this is probably the last thing you want to do right now, but given the current tax climate across the U.S., proactively advising your clients about state and local tax matters should be a critical part of managing their tax exposure, as well as providing good customer service. Addressing the following three points will help you identify potential liabilities or mistakes and give you the opportunity to minimize or correct these issues before further damage can be done.

1. Nexus

Identifying where your client is “doing business” is the first step to evaluating their filing responsibilities for state and local taxes. Nexus is the minimum connection or link between your client and a state seeking to tax them.

Historically, this connection was established through physical presence (i.e., employees, independent contractors or affiliates soliciting sales or performing services; owning or leasing real or tangible personal property; storing inventory in a warehouse, etc.). The extent of your filing requirements in a state largely depended on the nature of your business activities within that jurisdiction.

Times have since changed and physical presence is no longer necessary for many businesses to sell or market their goods and services. Many states now consider having an economic presence within their borders a sufficient enough connection to allow them to tax income.

The states also contend that advances in technology and electronic commerce have made the physical presence standard obsolete for sales and use tax purposes as well. For apportionment purposes, you should request sales, property and payroll dollars for all states, not just those states where your clients currently file returns.

This information is essential to determining whether your clients have exposure in other states. Further analysis may need to be done to assess whether these elements create nexus based on economic presence or statutory apportionment factors.

A growing number of states are turning to gross receipts taxes in lieu of income-based taxes as the nexus threshold for these taxes is minimal. For sales and use tax purposes, physical presence is still the “law-of-the-land” for the time being.

However, states are doing their best to expand this definition. If your clients sell products and services that are generally considered taxable in many states, you should determine what factors create nexus for sales and use taxes, and ask your clients questions about their business activities in these states.

If your clients are using a marketplace facilitator such as Amazon to sell their products, additional questions should be asked about these sales, especially if these clients are using Fulfillment by Amazon (FBA) services, and their inventory is stored in Amazon fulfillment centers across the country.  

2. Compliance

If your clients are filing returns for state and local income/franchise, gross receipts, sales and use, excise, licensing, payroll or property taxes in various jurisdictions, you should consider evaluating the quality and consistency of these returns, if they are being prepared and filed internally. Most of these returns have periodic filing deadlines (monthly, quarterly, etc.) and they often require an extensive amount of data from financial reporting systems or other information prepared by your client’s employees. You should also ask:

  • Who is responsible for ensuring these returns are accurate or filed and paid in a timely manner? Does anyone reconcile the amounts being reported to the books and records? How are discrepancies or questions resolved?
  • Are the correct sales tax rates being charged on sales? Are they sourcing revenue or income properly?
  • Did they register with the Secretary of State to do business? If so, they may be required to file income/franchise returns.

State taxing authorities do not have sympathy for taxpayers whose defense for filing incorrectly is that they were unaware of the law or did not understand filing instructions. If your client is regularly paying large tax assessments resulting from audits or receiving notices for late or unfiled returns or calculation errors, these are all indications that there are shortcomings in the compliance process that need be addressed.

3. Audit Readiness

You need to prepare your client for the inevitable fact, that at some point, they will likely be audited by state taxing authorities. Audits can be an effective tool to generate revenue and improve compliance.

Audits are regularly performed in the field by agents who visit the client’s offices, but as more states start utilizing technology to review returns and identify discrepancies, taxpayers will be subject to desk audits about specific issues or asked to provide documentation to substantiate their returns. Audits can be difficult and time consuming, but they can be resolved efficiently as long as you prepare your clients upfront and make sure they are well organized and prepared for the auditors, their information requests and questions.

Reviewing the tax returns that were filed during the audit period will help you identify potential problems and serve as a guide for where you should focus your time. If the client has taken any aggressive positions on their income tax return, be prepared to defend this position and argue your case. Additionally, do not miss the opportunity to present potential refunds or credits to offset any tax that maybe assessed.

It is impossible to be an expert in all areas of the tax law. Know when it is time to consult a third party who specializes in a particular area of taxation, who is more adept than you or your client to resolve the audit issue.

Utilizing a more experienced resource in these circumstances will typically lead to a better result for your client. Reviewing these state and local tax matters with your client will give you the opportunity to identify potential issues that need to be addressed.

Some of these matters will likely require you to spend additional time reviewing tax returns, researching tax laws in various states and meeting with your client. However, investigating these matters now, when you have your client’s attention, can lead to additional client-service opportunities later on in the year.

It is in both yours and your clients’ best interest that areas of potential exposure are investigated and addressed, considering the financial implications of noncompliance. The professional liability risk practitioners face for not properly advising their clients on state and local tax matters can be considerable if you do not take action to mitigate this risk.

 

 

 

 

 

Skills That Help Accounting Professionals Succeed Alongside AI

(Financial Management) January 29, 2018 – There’s some understandable concern these days about the possibility that increased use of artificial intelligence (AI) will lead to job losses amongst accounting and audit professionals.

But Mike Baccala, PwC’s US assurance innovation leader, predicts that while accounting and auditing jobs may change as AI use becomes more prevalent, those jobs won’t go away. Baccala is co-author of a recent PwC report that predicts the effects that AI will have on the business environment.

He said PwC already is working with AI in a few capacities in client engagements. The firm is using an AI platform to help nonaudit clients extract data from their lease agreements as they implement the US Financial Accounting Standards Board’s new lease accounting standard. Without AI, this extraction would take eight to ten hours to perform for each lease contract, and some clients have thousands of lease contracts. With AI, that time is down to three or four hours per contract, and it’s continuing to decline.

In addition, PwC financial statement auditors are using AI to draw data out of client bank statements to help with substantive testing that’s required for auditing of cash. In both cases, Baccala said, the AI hasn’t resulted in people being taken off the projects; instead, the people are performing different duties.

The AI is pushing people towards performing work that is more interesting, Baccala said. For a long time, one of the more tedious tasks for accountants and auditors has been the process of taking data and organizing it before it is analyzed and audited. This data could take the shape of a bunch of receipts and invoices in a shoebox, or the form of various ledgers and spreadsheets.

AI can replace humans at the dull task of extracting, organizing, and structuring the data. But those same accountants and auditors working with AI perform different tasks. First, they teach the AI what data to look for and how to organize it. Then they investigate anomalies. And because the AI is working with all data rather than just a sampling (in the case of audits), there may be more anomalies to investigate.

Meanwhile, the AI-enabled auditing of all data rather than just samples is providing more value to clients.

“We haven’t actually removed anybody from the practice [because of AI],” Baccala said. “We’ve freed them to do other things, and we’re helping more clients with the process.”

Baccala acknowledged, though, that a significant amount of “reskilling” needs to take place to help accountants and auditors work effectively with AI. He said traditional CPA skills such as skepticism, judgment, analysis, and understanding technical accounting will become even more important because those are qualities that AI is unlikely to ever duplicate and, in a data-governed world, they are vital.

New skills that help accountants and auditors succeed with AI include:

  • Fundamental data skills. “If you look at every client and the variability in their own systems, processes, data, policies that affect that data and how the accounting gets done, it’s a massively complicated web of different variables that can change from client to client,” Baccala said. The most successful accountants and auditors will possess core data skills that allow them to succeed as they serve clients with different systems and policies. These include data strategy and data processing skills, as well as proficiency in statistics, probability, and deductive reasoning.
  • Storytelling ability. PwC is focused on training its people in the art of using data to effectively convey meaning and a message through storytelling. The AI can provide huge amounts of data, but that’s useful only if accountants and auditors understand how to translate the data in a way that makes sense to their audience.
  • Ability to automate. Accountants and auditors are likely to encounter processes used by clients that could be improved through automation. Whether those are production processes or finance processes, the ability to implement automation to improve efficiency and reduce costs will be a differentiator for CPAs.

Baccala cited studies pitting chessmasters against machines to explain that people and machines working together have been shown to be much more effective than either people or machines working on their own. He sees technology, people, and processes as a three-legged stool essential for success in any business. If you cut one leg short, the stool won’t support much weight.

So while leaders in business and the accounting profession embrace technology, they should be careful not to neglect their workforces and their processes, Baccala said.

“You cannot leave the people behind,” he said. “Any organization that’s trying to do this isn’t going to get very far with AI if they’re not upskilling their people and using people as part of the process to move forward.”

 

 

 

 

 

Are Your 2018 Benefit Changes Legally Effective?

(JDSupra) Walter Miller, February 7, 2018 – ERISA requires that benefit plans contain formal procedures for the adoption of amendments to the plan, including the underlying benefit programs. However, many employers routinely implement annual changes to their health and welfare benefit programs simply through the reissuance of benefit booklets without adhering to formal amendment procedures. A recent lawsuit brought by the Department of Labor against Macy's underscores the consequences of bypassing the ERISA amendment rule.

The Facts of the Case:

  • Macy’s health plan document stated that amendments to the plan needed to be made by a written action approved by the Chief Executive Officer (“CEO”), or an officer to whom the CEO delegated that authority.
  • Benefit booklets prescribing the terms and conditions of benefits provided under the health plan form part of the “plan.”
  • As is not unusual, Macy’s made changes to its health benefit program administratively or through revisions to the benefit booklets at annual open enrollment. These routine changes were not formally approved via a written instrument executed by the CEO or his or her delegate.
  • The Department of Labor filed a lawsuit in federal court alleging that Macy’s breached its fiduciary duties by not following the terms of the plan, and that the benefit changes that had not been formally approved were not legally effective.

Discussion

ERISA, the federal law governing employee benefit plans, requires that a plan be maintained pursuant to a written document. It further expressly requires that the terms of the plan “provide a procedure for amending such plan, and for identifying the persons who have authority to amend the plan.”

Retirement plans, such as 401(k) plans, are generally self-contained. Thus, when changes are required to be made to a retirement plan (which occur fairly infrequently), they are affected by a written document formally adopted by the employer and executed by an appropriate officer.

In contrast, health and welfare benefit plans usually are comprised of multiple documents, such as benefit booklets, summary plan descriptions and insurance certificates. These documents, taken together, form the “plan.” In addition, changes to benefit programs are typically made yearly. The customary approach to process the changes is for the employer’s human resources staff to discuss the changes with the insurance carrier or consultants, with the revisions then incorporated into the benefit booklets provided to employees during open enrollment. No formal action similar to that undertaken with respect to an amendment of a retirement plan is taken to adopt or ratify the annual health and welfare changes.

This informal practice of implementing benefit plan modifications has generally been acceptable, until last year when the Department of Labor filed a lawsuit against Macy’s, Inc. over a number of fairly minor matters. One such matter involved the effectiveness of a benefit change in the Macy’s health plan that was informally implemented. Macy’s plan document included the procedures for amending the plan. Specifically, it stated that amendments would be made by “written action approved by the Chief Executive Officer, or any officer of the Company to whom he delegates such authority as he deems appropriate.” However, the change at issue was implemented as a routine modification, and not formally adopted by means of the written action of an authorized officer as prescribed under the terms of the plan.

In the federal lawsuit, the Department of Labor alleged that Macy’s breached its fiduciary duties under ERISA by failing to discharge its duties in accordance with the documents governing the health plan. The prayer for relief included a request that the court order Macy’s to re-adjudicate all the benefits that were paid under the revisions that had not been formally approved.

Many employee benefit plans have amendment procedures similar to Macy’s providing that amendments must be made via a written instrument approved and executed by the Board, the chief executive officer or some other senior officer. Other plans do not provide anything at all.

What You Can Do

ERISA cannot be ignored. In that regard, it is our advice that health and welfare plans be reviewed to ensure that (i) amendment procedures are in fact prescribed in the governing plan document, and (ii) the procedures are consistent with the manner in which changes to benefit offerings are actually implemented. Otherwise, the Department of Labor or a covered employee could bring a claim asserting that informally implemented plan changes are not legally effective, which constitutes a breach of the employer’s fiduciary duties.

 

 

 

 

 

Can Another Digital Demand Crush Be Avoided?

(Financial Planning) February 7, 2018 – With digital operational problems having hobbled a number of wealth management firms during the height of the Feb. 5 market downturn, executives gathered at the T3 Advisor Conference asked aloud if the entire industry was in need of a technology overhaul.

“Until then, everything was up, everything was easy, and systems were not being pressure tested,” says Brian Shenson, former vice president of advisor technology at Schwab. “All of a sudden, there’s a huge spike of volume in trading and a huge spike in user interest, and then crashes. I wonder if firms got a little complacent.”

There was no shortage of industry predictions that digital advice would be tested in a market downturn. The top two independent digital advisors, Betterment and Wealthfront, were so inundated by visitor traffic that many users found their websites inaccessible as the Dow plunged 1,175 points, or 4.6%, on Monday — the largest one-day point drop in history.

And they weren't the only ones to encounter technical problems. Large discount brokerages, including Vanguard, Fidelity, Schwab, T. Rowe Price and TD Ameritrade also acknowledged varying degrees of service outages to websites and mobile apps, as customers complained on social media about not being able to access accounts.

Shenson, who now runs his own consulting firm in the Bay Area, says the widespread issues of capacity suggested to him that a number of wealth management providers need to reevaluate their assumptions about servicing demand, particularly during a downturn.

“I wonder if firms aren’t being as proactive as they could be in recalibrating their baseline for spike activity,” Shenson says. “You’ve got all these new accounts coming online, you’ve got volume growth. What will a spike day look like now? You’ve got to constantly reforecast for spikes.”

The issues affecting firms on Monday were not due to cloud computing providers, says Robb Baldwin, CEO of Gainesville, Florida-based custodian TradePMR, which relies on Amazon Web Services and conducted its own day-after investigation.

“All firms do everything in their power to prepare for a worst-case scenario,” Baldwin says. “The large spikes in attempts by clients to log in, trade, get answers about accounts and move money all at once were more momentous than any of us had estimated.”

Baldwin says the technical issues that firms experienced Monday should spark an industry-wide discussion about the infrastructure it has relied on as it transitions to all-digital platforms, much like firms did after the first flash crash in 2010.

“How much infrastructure will firms need to scale to the cloud going forward?” he asked.

Advisors also need to rethink their risk estimations and how they communicate that to clients, adds Joe Elsasser, president of advisor software provider Covisum.

“The more central technology becomes to the overall client experience, the more important it will be for firms to be prepared for a run on the bank,” Elsasser says. “A crisis is when everyone wants service.”

A number of advisors are still using risk methodologies that predict market drops like what occurred on Monday are very rare occurrences, Elsasser notes. “Eventually our industry has to move toward heavy-tail models. The old models are wrong too often.”

Some executives spotlighted the outages experienced by Wealthfront and Betterment, suggesting securities regulators should scrutinize their actions.

“To have their websites crash during a period of sharp market volatility... precluding these consumers from having access to their money and control over their accounts, is completely intolerable,” says Ric Edelman, chairman and co-founder of Edelman Financial Services. “If Merrill Lynch had attempted to pull that stunt, the SEC would have already shut them down."

Edelman was "name calling and spreading fear," says Wealthfront spokeswoman Kate Wauck. "[Edelman] probably had a hard time justifying his 2% fee this week and clients must not be falling for his sales pitch anymore." Betterment declined comment.

Other executives however adopted a more forgiving perspective. Monday’s experience will definitely help digital-first firms become better prepared for another market dip, says Kendrick Wakeman, CEO of analytics firm FinMason.

“The newer companies now have a taste of dealing with big demand and knowledge of what happens when the market goes down, and they will rethink their scalability,” he says. “For established firms, they might need to operate more in the cloud.”

The structures of robo advisors are actually more complex than even most advisors realize, says Eric Clarke, CEO of Orion, noting that major robo advisors are acting as the RIA and doing record keeping in omnibus accounts back at the clearing firm.

“These systems can get severely stretched as online activity increases and as market volatility increases,” Clarke says.

The behavior displayed by many investors on social media demonstrates another unforeseen difficulty as firms convert do-it-yourself investors to advice, even digital advice, Clarke adds.

“With do-it-yourself investors, when there’s widespread panic in the market, they tend to panic,” Clarke says. “They’re going to be more apt to jumping on those websites, wanting to trade those accounts.”