Bramwell’s Lunch Beat: The 411 on ‘Critical Audit Matters’

On July 1, many states will cut taxes
July 1 is the start of most states' fiscal years, and for the first time in years, governors and legislators are cutting some taxes, taking advantage of an improved revenue outlook, and banking on the financial breaks to encourage business and job growth in their states, Susan Milligan wrote in an article for Stateline, the news service of the Pew Charitable Trusts.

For example, Indiana and Rhode Island businesses will see a drop in their corporate tax rates on July 1. In Idaho, people and businesses purchasing software through the cloud will be spared sales taxes. And starting on Tuesday, Maryland is beefing up tax credits related to cybersecurity, biotechnology, and research and development to encourage companies to relocate to the state.

“In 2010, we really saw a lot of tax and fee increases to bring revenues into cash-strapped state coffers,” said Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers, according to the article. “This year was the first year (since then) governors actually proposed tax and fee decreases. We’ve definitely seen a movement to try to reduce taxes and fees and encourage job growth.”

Consumers are getting a bit of a break in some states as well, Milligan noted. In Florida, youth bicycle helmets, child restraint systems, and booster seats will be tax exempt. California drivers get a 3.5-cent decrease in the gasoline tax. Rhode Islanders will be spared a controversial 10-cent toll on the Sakonett Rover Bridge (although a future, scheduled increase in the gas tax will be levied to pay for upkeep on the structure). And local farmers in Arkansas will see a drop in certain sales taxes associated with agriculture and energy used by farmers.

Nothing if not critical
A proposal by the Public Company Accounting Oversight Board (PCAOB) that would require auditors to disclose “critical audit matters” in their reports has generated apprehension among audit firms and pushback from CFOs, David M. Katz of CFO wrote on Monday.

The proposal would call on auditors to reveal to the public what kept them up at night as they struggled with finance executives and management accountants to make sure companies had gotten their numbers right and were reporting them accurately. If the proposal is eventually enacted, investors will get something they have long been looking for: the ability to see inside the mind of the auditor during an audit, Katz noted.

The PCAOB’s proposal doesn’t call for auditors to provide original information about a company’s performance and operations, notes Martin Baumann, the board’s chief auditor and standards director, according to the article. It simply wants them to disclose the significant issues they dealt with in the course of doing an audit.

But under the proposal, auditors would have to provide their own disclosures of critical audit matters. Even if an auditor omits to cite significant issues with the audit, that would still be saying something, Katz wrote. In addition, the auditor’s assessment of the audit would be publicly filed, which is not done under current rules, meaning that he or she could be second-guessed – or even sued.

Finance chiefs much prefer the current situation in which management is the sole communicator of information to the public.

“Most CFOs want to tell their own story in their own words,” says George Victor, a partner with Giambalvo, Stalzer, a CPA firm in Great River, New York, according to the article. If he were a finance chief, he adds, he wouldn’t “want the world to know how complicated my revenue recognition is, or how hard a time the guy had in doing the audit.”

Inspection finds defects in 19 PricewaterhouseCoopers audits
Michael Rapoport of the Wall Street Journal reported on Monday that the PCAOB found deficiencies in 19 of 59 audits conducted by PricewaterhouseCoopers LLP (PwC) in their latest annual inspection of the Big Four accounting firm's audit work.

That rate of 32 percent is down from last year's 39 percent, when the PCAOB found 21 deficient audits out of 54 inspected.

Among the deficiencies the PCAOB found in one or another of PwC’s audits were insufficient procedures to evaluate a company's revenue; insufficient analyses of goodwill and intangible assets; and deficiencies in its checking of clients’ accounting for acquisitions, Rapoport wrote.

Some of the deficiencies the inspectors found were significant enough that it appeared PwC hadn’t obtained sufficient evidence to support its positive audit opinion on a company's financial statements, the PCAOB said, according to the article.

PwC in a statement said its investments in improving its audits and the efforts of its partners and staff “are producing continued improvements in audit quality at PwC.”

[Also, check out additional articles on the PwC inspection report from Going Concern and Compliance Week.]

Companies with low turnover are stingy with CFO pay raises
Emily Chasan, senior editor of the Wall Street Journal’s CFO Journal, noted in an article on Monday that companies without executive turnover at the top gave modest pay increases to their CFOs last year.

That is a switch from the past few years. Between 2010 and 2012, CFO pay at companies with veteran leadership increased at a faster rate than CEO pay, according to pay consultant Compensation Advisory Partners. Last year was the first time that trend has reversed, potentially signaling slower CFO pay increases in the future, Chasan wrote.

Growth in median CFO compensation was just 3.2 percent last year, while CEO compensation grew 5.2 percent, according to the firm’s study of 92 public companies where the CFO and CEO held the same roles three years or longer.

By contrast, in 2012 CFO pay rose 1.4 percent while CEO pay declined 0.3 percent, the firm said. In addition, the number of CFOs receiving salary increases dropped last year. Just 73 percent of CFOs in the study got salary raises in 2013, down from 85 percent in 2012, the article stated.

US top court takes up challenge to Colorado sales tax law
Lawrence Hurley of Reuters reported on Tuesday that the US Supreme Court agreed to weigh a challenge to a Colorado law that requires out-of-state retailers to provide data on sales they make to customers in the state in an effort to encourage the payment of sales tax.

The court agreed to hear an appeal by the Direct Marketing Association, which is challenging an appeals court determination that federal courts did not have jurisdiction to hear the case.

The 10th US Circuit Court of Appeals held in an August 2013 ruling that the direct marketing trade group could not sue under the federal Tax Injunction Act, which limits challenges to state taxes to state courts, Hurley wrote.

The 2010 law was enacted to encourage residents to pay the 2.9 percent sales tax on purchases they make out-of-state, including from online retailers. Companies operating within the state collect the sales tax themselves but out-of-state companies are not required to do so. The law requires them to notify consumers that they are required to pay the tax.

IRS says bitcoin not reportable on FBAR (for now)
June 30 was the deadline for mandatory electronic filing of the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts, or what used to be called the FBAR. It’s a firm deadline: There are no extensions, wrote Forbes tax contributor Kelly Phillips Erb.

Those US persons who are required to file an FBAR include those with a financial interest in or signature authority over at least one financial account located outside of the United States if the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year, she noted. The reporting obligation may exist even if there’s no associated taxable income. If you fail to file an FBAR, you can be socked with some pretty hefty penalties: up to $10,000 per violation for nonwillful violations and up to $100,000 or 50 percent of the balance in the account for willful violations.

“It’s a pretty broad scope. But what’s more interesting than what is included is what is excluded: taxpayers don’t have to report certain Bitcoin holdings,” Phillips Erb wrote.

According to an IRS statement, the FinCEN “is not requiring that digital (or virtual) currency accounts be reported on an FBAR at this time but may consider requiring such accounts to be reported in the future. No additional guidance is available at this time.”

The lost emails of the IRS point to a wider problem
That problem includes outdated technology and regulations, according to Derek Willis of the New York Times’ The Upshot. He wrote on Monday: “During last Monday’s congressional hearing into the IRS’s loss of emails, Blake Farenthold, a Texas Republican, offered what on first glance seemed a simple solution to archiving agency email: ‘I went on Amazon and found you could buy a terabyte hard drive for $59. Buy two of them, so $120.’

“If only it were that easy. Two large-capacity hard drives would indeed have provided the storage the IRS office needed, but Mr. Farenthold’s proposal obscures the other obstacles the IRS and other government agencies face. Federal agencies are hampered both by outdated and expensive computing infrastructure and by regulations that won’t require modern storage and retrieval techniques until the end of 2016 at the earliest.”

Even requiring agencies to store emails as electronic records rather than on paper might not solve the federal government’s problems with record management, Willis wrote. Carl Malamud, the founder and president of the nonprofit Public.Resource.Org, which places state and federal government information in the public domain, described a deeper problem: Despite spending billions on information technology, the federal government has not kept pace with advances in technology. It has developed a defensive posture when the public and Congress demand information.

“In my view, one reason people dump so much on the Civil Service is that the Civil Service is forced to work with the most God-awful tools known to modern organizations,” Malamud said, according to the article. “We spent $80 billion a year on IT, and I’ve heard that 75 percent of that is a total waste, the end result being that we paralyze the bureaucracy and they in turn develop a real attitude.”

Quick Links:

  • Indiana CPAs can now “play” their way to CPE (Going Concern)
  • EY announces 675 new partners worldwide (EY)
  • BNP Paribas admits guilt and agrees to pay $8.9 billion fine to US (DealBook)
  • Mergers hit a 7-year high, propelled by a series of blockbuster deals (New York Times)
  • How EPA’s carbon rule is both tax and subsidy (Forbes)
  • FATCA, IRS global tax law, is everywhere – even Russia & China (Forbes)
  • What IRS calls ‘willful’ may surprise you – and mean penalties, even jail (Forbes)
  • IRS strategic plan highlights effects of budget cuts (Tax Analysts)
  • States should cede some taxing power to the Feds (Tax Analysts)
  • Supreme Court finds contraceptive tax costs ‘substantially burdensome’ in its ruling for Hobby Lobby stores (Don’t Mess With Taxes)
  • Japan corporate sentiment worsens after tax rise (Wall Street Journal)
  • Christie signs $32.5 billion budget, axes several tax hikes floated by Democrats (The Star-Ledger)
  • PA budget: Cigarette tax for Philly schools still in play (Philadelphia Business Journal)

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