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Bramwell’s Lunch Beat: The IIA’s Got a Shiny New Tool for Internal Auditors

Nov 12th 2014
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Non-GAAP measures and one-time adjustments
Last month, PwC released a report that analyzed the various types of non-US Generally Accepted Accounting Principles (GAAP) measures that were used by more than 400 initial public offerings (IPOs) completed between 2011 and 2013. According to the study, close to 60 percent of IPOs used at least one non-US GAAP measure in their financial statements during those three years. Of those, 65 percent focused on earnings before interest, income taxes, depreciation, and amortization (EBITDA) measures.

In a Nov. 3 blog, research firm Audit Analytics focused on a slightly different aspect of non-GAAP measures – namely, whether extensive use of non-GAAP language in financial reporting documents could be used as a leading indicator of subsequent one-time adjustments. Numerous nonrecurring adjustments are often associated with lower quality of financial reporting, wrote Olga Usvyatsky of Audit Analytics.

Audit Analytics found that nearly 8 percent of 556 companies that used non-GAAP language 20 or more times from Oct. 1, 2013 to Sept. 30, 2014 disclosed an out-of-period adjustment; only 3.7 percent of 1,001 companies that did not use non-GAAP language disclosed an out-of-period adjustment. Also, companies with substantial use of non-GAAP language were more likely to have a restatement, according to the article.

Read more here.

IIA unveils career mapping tool for internal auditors
A free online tool that provides internal audit practitioners a means to evaluate their professional competencies and plot their careers was recently launched by the Institute of Internal Auditors (IIA).

The tool, IIA Career Map, provides internal auditors with a “comprehensive tool to evaluate their professional strengths and development needs in key areas, such as communications and critical thinking, and build a personalized, detailed plan that guides them in reaching the next level in their career,” IIA President and CEO Richard Chambers said in a written statement.

Chambers added that because of greater pressures on internal audit and the natural evolution of the profession, a tool that provides strong career guidance was needed. “IIA Career Map fills that need,” he said.

To use the tool, internal auditors first have to register, then perform an initial self-assessment. The self-assessment allows users to rate themselves in the following 10 core competencies:

  1. Professional ethics
  2. Internal audit management
  3. International Professional Practices Framework
  4. Governance, risk, and control
  5. Business acumen
  6. Communication
  7. Persuasion and collaboration
  8. Critical thinking
  9. Internal audit delivery
  10. Improvement and innovation

Based on the input, the tool assigns one of five proficiency ratings for each of the 10 areas and produces a customized report that then rates the user against target proficiencies for their current role.

In addition, IIA Career Map creates a personalized learning plan that recommends training, publications, and other professional resources to address proficiency gaps. The final step is creation of a plan to help set priorities to reach development goals, develop action items, and activate workflow reminders to keep the user on track.

The tool also allows users to match their competencies against job roles to which they aspire. The result is an action plan for developing specific competencies for career advancement.

In the first quarter of 2015, the IIA plans to introduce Team Builder, a fee-based component to IIA Career Map that is designed to help chief audit executives evaluate staff competencies and development needs. Team Builder also will help identify the skills needed to round out teams, either through recruiting or development of existing staff.

How mobile-game makers account for magic-wand sales
An interesting article in the Wall Street Journal’s CFO Journal on Tuesday explained how anticipating when players lose interest in a mobile videogame is a key part of recording revenue for game companies, where the sale of “virtual durable goods,” such as cows and tractors in “FarmVille” or cannons and dark barracks in “Clash of Clans,” is a major source of income.

Some virtual goods, like potions and spells, are good for a single use, and are accounted for as a one-time sale. These goods are accounted for like services or club memberships. Companies book part of the player’s payment upfront, but defer the rest until the end of the average period in which the item will be used – whether four days or 14 months, wrote Emily Chasan, Noelle Knox, and Tiziana Barghini.

“The thing that’s so weird is if people lose interest, and start playing for a shorter period, it drives faster revenue recognition. The shorter playing period is a negative for the business, but it is going to drive higher revenue,” said Jill Lehman, head of technology, media, and telecom research for forensic-accounting analysis firm CFRA, according to the article.

Game makers say they base their estimates on historical data, but that the playing periods can change substantially each year, especially for the newest and more popular games.

Since 2010, the US Securities and Exchange Commission (SEC) has sent more than two dozen letters to companies, such as Zynga Inc., asking them to explain more about how they come up with these estimates, according to the article.

IRS clarifies application of one-per-year limit on IRA rollovers
New guidance issued by the IRS on Monday clarifies the impact a 2014 individual retirement arrangement (IRA) rollover has on the one-per-year limit on tax-free rollovers between IRAs.

As a result of a January 2014 decision by the US Tax Court, an individual was prevented from making more than one tax-free rollover in any one-year period, even if the rollovers involved different IRAs. Before 2015, the one-per-year limit applied only on an IRA-by-IRA basis (rollovers involving the same IRAs). But beginning in 2015, the limit will apply by aggregating all of an individual’s IRAs, effectively treating them as if they were one IRA for purposes of applying the limit. The IRS announced in April that the new interpretation would not go into effect before Jan. 1. 2015.

In new rules issued on Tuesday, the IRS emphasized that the new interpretation will begin on Jan. 1, 2015. The tax agency also noted that distribution from an IRA received during 2014 and properly rolled over (normally within 60 days) to another IRA will have no impact on any distributions and rollovers during 2015 involving any other IRAs owned by the same individual. This will give IRA owners a fresh start in 2015 when applying the one-per-year rollover limit to multiple IRAs.

Although an eligible IRA distribution received on or after Jan. 1, 2015, and properly rolled over to another IRA will still get tax-free treatment, subsequent distributions from any of the individual’s IRAs (including traditional and Roth IRAs) received within one year after that distribution will not get tax-free rollover treatment. According to the new guidance, a rollover between an individual’s Roth IRAs will preclude a separate tax-free rollover within the one-year period between the individual’s traditional IRAs, and vice versa.

Roth conversions (rollovers from traditional IRAs to Roth IRAs), rollovers between qualified plans and IRAs, and trustee-to-trustee transfers (direct transfers of assets from one IRA trustee to another) are not subject to the one-per-year limit and are disregarded in applying the limit to other rollovers.

IRA trustees are encouraged to offer IRA owners requesting a distribution for rollover the option of a trustee-to-trustee transfer from one IRA to another IRA. IRA trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly from one IRA to another, or by providing the IRA owner with a check made payable to the receiving IRA trustee.

More information on the rule change can be found on IRS.gov. Type “IRA” in the search box.

Internet sales tax faces Republican opposition
John D. McKinnon and Kristina Peterson of the Wall Street Journalreported on Tuesday that brick-and-mortar retailers who had hoped Congress would pass a bill to effectively end tax-free online shopping are likely to be disappointed.

House Speaker John Boehner (R-OH) indicated this week that he would block the measure, which would give states the ability to compel many online retailers to collect sales tax for them.

The Senate passed the bill – known as the Marketplace Fairness Act – more than a year ago with broad bipartisan support. Supporters view the measure as a matter of fairness to storefront retailers that have to collect the tax. Retailers argue that online merchants gain a significant competitive advantage from tax-free Internet sales. House Republicans, though, have never warmed to the bill, worrying that voters could view it as an indirect tax increase, McKinnon and Peterson wrote.

In response, Senate sponsors hoped to force the measure’s passage by combining it with another measure that is widely popular – an extension of the 15-year-old moratorium on state taxes on Internet access, known as the Internet Tax Freedom Act, which expires on Dec. 11. But this week, Boehner let it be known that he opposes that maneuver, significantly weakening the bill’s chances.

“The speaker has made clear in the past he has significant concerns about the bill, and it won’t move forward this year,” Kevin Smith, a spokesman for Boehner, said in a written statement, according to the article.

[Some additional reading: The Wall Street Journal also wrote an editorial on the future – or lack thereof – of the online sales tax bill.]

CAQ and AAA seek proposals for Access to Audit Personnel program
The Center for Audit Quality (CAQ) and the American Accounting Association (AAA) Auditing Section announced on Monday a request for proposals (RFP) for a joint program designed to facilitate accounting and auditing academics’ ability to obtain access to audit firm personnel to participate in their research projects.

The two groups established the Access to Audit Personnel program in 2012 to generate research on issues that are relevant to audit practice while providing doctoral students and those professors seeking tenure with access to audit firm personnel to complete the research study protocols.

CAQ Executive Director Cindy Fornelli said the joint venture with the AAA has helped to bridge a gap between accounting and auditing researchers and the profession.

“We are excited to continue this valuable program, which aims to encourage accounting scholars to focus their interests on topics that are relevant to the public company auditing profession,” she said in a written statement.

Jay Thibodeau, president of the AAA Auditing Section, said the program “provides an important mechanism for accounting scholars to collect data from professionals, thereby enabling the completion of timely and critical research related to the judgments and decisions made by audit professionals at the largest public company auditing firms.”

The RFP for the Access to Audit Personnel program seeks proposals submitted by doctoral students and tenure-track faculty. A committee of senior academics and audit practitioners will evaluate the proposals based on such factors as ability to address important research questions that are relevant to practice, contribution to academic literature, and methodological soundness.

In 2014, four projects received access awards that resulted in obtaining participation of nearly 580 audit personnel. The estimated level of effort for the research awards is more than 355 hours. The number of participants requested in these projects ranges from 120 to 160 audit firm personnel. The personnel requested includes all levels, from audit seniors (those with three to five years of experience) to audit partners. Protocols were administered through various formats: in-person at firm training sessions, online, or hard copy distributed directly to participants.

Unlike the CAQ’s other research grant program, where academic scholars seek funds to develop a research topic, the applicants in this program must submit a data collection protocol that is ready to be fielded. The expectation is that the data collection will be completed within five months of award, before the start of the profession’s “busy season.”

Proposals may be submitted using a new online application process. The deadline for submitting a proposal is 5 p.m. EST on Feb. 2, 2015.

CIMA/AICPA: ‘Open workforce’ challenging corporate control of cost, performance
According to a new report from the American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA), organizations around the world are rapidly reshaping their workforces with a complex mix of internal teams and external talent, outpacing their ability in many cases to effectively manage costs, performance, and decision-making.

The accountant groups released the findings of their report, New Ways of Working: Managing the Open Workforce, at the World Congress of Accountants in Rome on Tuesday. More than 1,100 senior executives worldwide were surveyed for the report by Longitude Research on behalf of the AICPA and the CIMA.

According to the report, organizations are increasingly relying on consultants, contractors, freelancers, and outsourced providers as they seek greater operational flexibility and agility in developing new ideas. This shift to the “open workforce” is expected to accelerate in the next five years, with more than a third of those surveyed expecting at least half their workforce to be made up of such external talent by 2020.

Many organizations are encountering significant challenges as they adapt. According to the report, only about two in five executives surveyed said their organizations have high levels of oversight on the cost, performance, and productivity of the external resources they use. They face risks of data breaches and disclosure of competitive information and struggle to maintain consistent quality decision-making at all levels. It’s also particularly difficult to strike the right balance between control and empowerment. Sixty-two percent said they are struggling to get the mix right or feel that they have it wrong.

“The converging forces of globalization, digitization, and market flux have given rise to a powerful new force – the open workforce,” CIMA Chief Executive Charles Tilley, FCMA, CGMA, said in a written statement. “This trend holds the potential for new levels of agility, creativity, and cost savings, but most organizations aren’t yet equipped with the controls and practices necessary to maximize opportunities and offset risks. Management accountants must play a critical role in creating the frameworks and discipline required to unite today’s disparate organizations and their more fluid workforces.”

The global survey, which spanned 35 countries, showed strong interest in deeper engagement with the finance team. Nearly nine in 10 executives said a closer partnership with finance in the decision-making process would help them better manage their organizations in the coming years. The same majority also want a better process to pull insight from financial and nonfinancial information and a way to model value creation to make the benefits and risks of opportunities clearer.

While all organizations are struggling to find the right balance, executives who said their organiations are outperforming their peers also showed higher propensity for leveraging the open workforce, according to the report. Among other factors, high performing organizations are better at balancing control and autonomy, and are more likely to have the tools, strategies, and frameworks in place to manage these complex structures.

“Adapting to the open workforce will be a defining challenge for business leaders over the coming decade,” said AICPA President and CEO Barry Melancon, CPA, CGMA. “Finance teams must take a leadership role to make sure agility does not erode accountability. They must equip organizations with the tools, structures, and insight to balance the benefits against the risks and keep organizations on a path to long-term sustainability.”

Quick Links:

  • The “youngest CPA ever” will make you feel like a lazy, unmotivated turd (Going Concern)
  • Falling off the corporate ladder (literally): An alternative path to a career in accounting (Going Concern)
  • Mackintosh predicts period of calm for financial reporting (Accountancy Age)
  • Awards honor Most Powerful Women in Accounting (CPA Practice Advisor)
  • PwC’s 2015 Managing Your Wealth guide highlights need for effective planning in uncertain financial environment (PwC)
  • Kane, Bowles & Moore joins Dermody, Burke & Brown (DB&B)
  • AICPA Foundation awards minority doctoral fellowships to increase diversity in college and university classrooms (AICPA)
  • Illinois CPA Society hosts the Mary T. Washington Wylie Internship Preparation Program (Illinois CPA Society)
  • At last, a chance to get to the bottom of the IRS mess (Wall Street Journal)
  • Capital-gains tax is a puzzle as Shanghai market opens (Wall Street Journal)
  • US Supreme Court hearing today could be pivotal for Maryland tax issue (Washington Post)
  • President Obama raised middle-class taxes and lost an election (Washington Post)
  • Want communion? Pay your taxes (Bloomberg View)
  • Obamacare Cadillac plans? You’re gonna pay for that … (CNBC)
  • Tax Court goes to Webster for definition of construction – and watch that NAICS code (Forbes)
  • Will tightening of tax laws deter Pfizer’s hopes? (Forbes)
  • A visual guide to business, taxes, and the economy (Tax Foundation)
  • How corporate integration increases transparency and eliminates double-taxation (Tax Foundation)
  • Income tax cuts increase growth but reduce revenue (Tax Foundation)
  • Young people aren’t saving (Tax Foundation)
  • Democrats getting what they deserve on medical device tax (Tax Analysts)
  • A Republican Königgrätz? (Tax Analysts)
  • Your quick guide to dynamic scoring in the next Congress (Tax Analysts)
  • Now is the perfect time to raise gas taxes (TaxVox)
  • 2015 inflation adjustments for exemptions, deductions, more! (Don’t Mess With Taxes)
  • Xero ups the pace of accounting tech innovation; announces Xerocon 2015 (Xero)
  • American Express partners with Intacct to help mid-market companies save time and hassles by making commercial payments via the cloud (American Express)
  • New Wolters Kluwer, CCH tax briefing provides expert guidance on year-end tax planning (Wolters Kluwer, CCH)
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