Journal of Accountancy

Short takes, notes and items of interest.

FYI

The International Federation of Accountants released a new discussion paper on information technology and education. Implementing International Education Guideline 11, Information Technology in the Accounting Curriculum, Strategies of the American Institute of CPAs , is intended to help determine the changes needed in accounting education, including continuing professional education, to better develop information technology skills. For more information on the discussion paper, contacct Milou Kelley at the IFAC at 212-302-5952.
The Federal Deposit Insurance Corporation issued Your Insured Deposit , which provides details on deposit insurance information provided by financial institutions. The booklet is available in quantity to insured financial institutions for distribution to their customers. It can be ordered by fax as 202-898-3549; requests mus be on the institution's letterhead stationery and include the address where copies should be mailed and the name and telephone of a contact person.
Beta Alpha Psi, the national honorary accounting fraternity with headquarters in the AICPA New York City offices, named Clark H. Johnson, vice-president of finance and chief financial officer of Johnson & Johnson, accountant of the year in industry/government.

Microsoft and the AICPA

Microsoft and Institute Join Forces

B ill Gates, chairman and chief executive officer of Microsoft, announced that his company and the American Institute of CPAs are forming an affiliation to help CPAs learn more about information technology and expand their services as technical advisers. Microsoft is already involved in helping state CPA societies with work on the Internet (see JofA, Oct. 96, page 4).

In the first half of this year the AICPA and Microsoft will host a conference designed to educate managing partners about business systems consulting. CPAs will get the details on how to build a technology consulting practice, with emphasis on how a CPA with both business knowledge and technical skills can provide small businesses with the advice they need. "The strategic alliance with Microsoft builds on our complementary strengths, ensuring greater recognition for our members as strategic business advisers and information professionals for their clients and employers," said AICPA President Barry Melancon.

Helping CPAs shape the future
"Consulting services are the next big revenue pool for CPAs, but the infrastructure is not in place," Matt Davis, Microsoft's marketing manager for the accounting profession, told the Journal. By "infrastructure," Davis was referring not just to hardware and software but also to training and a change of mind-set. He said large firms were getting more of their revenue from consulting engagements than any other practice segment and that small firms, in an era of flat growth for many traditional CPA services, should consider increasing their consulting practices. "I believe 90% of all business problems have at their core a solution that involves technology," he said.

Long-term goals: more for all
Although many small firms already offer some consulting services, most are not realizing their potential, according to Davis. He said Microsoft's objective is to have 20% of all CPA firms derive more than a third of their revenue from business systems consulting. These firms would then be able to get their clients up to speed, creating a wave of technologically sophisticated small businesses. "We will work with the AICPA to develop a program with technology support, marketing assistance and education. We will develop and deliver the infrastructure in 1997."

What's in it for Microsoft? "The more businesses there are using information technology, the more customers there are for Microsoft," said Davis, who again emphasized that Microsoft's competitors could also reap rewards from an increased customer base. "We're growing the pie for CPAs, for ourselves-for everyone."

Small business:

Recent Depreciation Developments

T wo recent depreciation developments will affect small businesses that write off office furniture and equipment.

In Norwest Corporation v. Commissioner (TC Memo, 1995-390), the Tax Court said all industries could treat office furniture, fixtures and equipment as 5-year property for depreciation purposes. Prior to this ruling, Internal Revenue Code section 168 said that under the modified accelerated cost recovery system, property with a class life of 4 to 10 years could not be written off before 5 years and property with a class life of 10 to 15 years could not be written off before 7 years. In recent years, generally all office equipment has been considered 7-year property.

Revenue procedure 96-31 allows taxpayers that erroneously claim less than they are entitled to correct their depreciation errors. Although there are some exceptions, 96-31 creates an automatic consent to change the accounting method for property that previously was underdepreciated. Taxpayers must file Form 3115, Application for Change in Accounting Method, with the Washington office of the IRS on or before the 180th day in the year of change. There is no fee.

Observation: The Norwest ruling gives small businesses the opportunity to use the 5-year recovery period for office furniture, fixtures and equipment. Practitioners who wish to consider such use should review the Norwest decision for more details. Also, revenue procedure 96-31 gives both taxpayers and CPAs the opportunity to review past depreciation methods to see if property was underdepreciated and to change it to the correct amount without IRS consent. It is important to note that this ruling does not cover the prior year's overdepreciation. Such requests for change must still be made under the provisions of revenue procedure 92-20.

—Stanley Person, CPA, partner of Person & Co., New York City.

CORPORATE

Loan Fees in LBOs

I n a leveraged buyout (LBO), the debt incurred to finance the payments to the target company's shareholders almost always is assumed by the target company. The Internal Revenue Service treats the transaction as a redemption-the target company is considered to have redeemed its own stock.

For redemption treatment, Internal Revenue Code section 162(k) disallows a deduction for amounts paid by a corporation in connection with the reacquisition of its own stock, including loan acquisition costs and advisory fees. Accordingly, these expenses, normally deducted through amortization over the term of the loan, would not be deductible at all. In Fort Howard v. the Commissioner (107 TC no. 12, 1996), the Tax Court supported the IRS's position.

Now, under the Small Business Job Protection Act of 1996, Congress has overturned the IRS's position. Moreover, it has done so retroactively to the 1986 inception of section 162(k). Loan fees and other amounts properly allocable to indebtedness can be amortized over the term of the loan notwithstanding IRC section 162(k).

Observation: In the case of Fort Howard and for other taxpayers in this situation, loan fees can be deducted in an LBO without a challenge by the IRS.

INDIVIDUAL

Planning After Death

T he Internal Revenue Service recently allowed a taxpayer to plan his estate after he died. The taxpayer died on March 2, 1994, with a substantial balance in his individual retirement account (IRA) and before he had began receiving distributions. On March 21, 1990, he had executed a trust that was the beneficiary of the IRA; his wife, mother and three daughters were beneficiaries of the trust. The taxpayers spouse and mother predeceased him, and one of his daughters died on June 6, 1995. According to the trust instrument, the IRA was to be divided equally between the two surviving daughters. The bank trustee elected to have distributions made to the surviving daughters over the life expectancy of the deceased daughter because she was the eldest and the one with the shortest life expectancy.

Heres where the postmortem planning began. In order to avoid Internal Revenue Code section 408 (d)(3)(C) regulations, which prohibit rollover treatment for inherited IRAs, the bank trustee asked the IRA custodian to separate the IRA into two subaccounts. The bank assigned its beneficial interests as successor trustee in the two subaccounts to the two daughters, and the IRA remained in the taxpayers name. The creation of the subaccounts provided both daughters with the freedom to direct their own investment activities, to select their own custodian or investment adviser and to receive distributions from the IRA in an amount independent of the actions of the other.

In private letter ruling 9641031, the IRS sanctioned the taxpayers plan and issued the following five statements to help clear up regulations dealing with IRA distributions.

The trust beneficiaries qualified as beneficiaries of the IRA for purposes of determining the distribution period under IRC section 401(a)(9)(B)(iii).
The bank trustee could make the election to receive distributions over the deceased daughters life even though the bank was not the designated beneficiary of the IRA.
The designated beneficiary was determined when the taxpayer died. If there were multiple beneficiaries, the one with the shortest life expectancy would be the designated beneficiary for purposes of determining the distribution period under Treasury regulations section 1.401 (a)(9)(1), E-5 (a)(1).
The two subaccounts could be established without affecting the IRAs tax-deferred status.
The transfer of funds from the main IRA to the subaccounts would not be treated as a taxable distribution under section 408(d)(1).

Observation: This new ruling allowed for some postdeath decision making, but taxpayers should establish multiple IRAs during their lifetimes to provide for beneficiaries with special needs. Each separate IRA can be tailored to the specific needs of each beneficiary. Trusts can be used when needed, but generally only individuals can be designated as beneficiaries.

—Michael Lynch , CPA, Esq., Associate professor of accounting at Bryant College, Smithfield, Rhode Island.

INTERNATIONAL

Sourcing Losses

T he Internal Revenue Service issued proposed regulations for sourcing losses from the sale of foreign affiliate stock. Although they would be effective 60 days after they are finalized, taxpayers could apply them retroactively to stock losses for all open taxable years after 1986.

The sourcing of income and losses is used when (1) U.S. resident companies determine their foreign tax credit limitations and (2) foreign taxpayers determine their U.S. taxable income. Internal Revenue Code section 865 provisions on how gains should be sourced were enacted in 1986; however, with the exception of certain rulings on bank losses, the IRS has not provided rules for sourcing losses.

Section 865 generally bases the sourcing of gains from sales of personal property, including stock, on the taxpayers residence. One exception applies when the sale is made through a branch office. For U.S. residents, gains from sales made through a foreign office generally are considered foreign source gains if they are subject to at least 10% foreign income tax. Another exception allows gains from sales of foreign affiliate stock by a U.S. resident to be considered foreign sourced if the sales occur in a foreign country where the affiliates business generates more than half of its gross income.

Proposed regulations section 1.865-2(a) provides sourcing rules for losses from affiliate stock sales that generally mirror the gains rules. However, a U.S. residents losses attributable to a foreign office would be foreign sourced if a gain would have been taxable by a foreign country where the highest marginal tax rate is at least 10%.

The provisions dividend recapture rule would require allocation of a loss to the same income source as well as the same foreign tax credit limitation category as any dividend inclusion within 24 months of the loss sale. This recapture rule would not apply if the sum of all recapture amounts was less than 10% of the realized loss. The loss rules generally do not incorporate the special rule for gains from sales of foreign affiliate stock. However, a consistency rule would require a loss recognized on the sale of an 80%-owned foreign affiliate to reduce foreign source passive income if, within the past five years, the seller had recognized gain on the sale of a foreign affiliate sourced under the foreign affiliate stock rule. The five-year look-back would apply only to gains recognized after September 6, 1996.

Observation: The proposed regulations generally mirror the rules for gains from sales of affiliate stock and prevent potential whipsawing that could occur if, for example, losses from a sale of a block of affiliate stock could not be netted against gains from a sale of another block of the same stock. They also are favorable for U.S. multinationals because they generally result in U.S. source losses, which do not reduce the foreign tax credit limitation.

— Kenneth Kral, CPA, international tax partner ; Jack Serota, Esq., international tax manager ; Sophie Young, international tax associate, Price Waterhouse, New York City.

FYI

The Internal Revenue Service issued a model amendment for employee plan sponsors to use when amending their plans to comply with the requirements of the Uniformed Services Employment and Reemployment Rights Act of 1994 and the Small Business Job Protection Act of 1996. Designated sponsors adopting the model language do not have to apply to the IRS for permission or pay a user fee, but they are required to file Form 8837 Notice of Adoption of Revenue Procedure Model Amendments.
In private letter ruling 9640003, the IRS said farmers are precluded from using the installment method of accounting for alternative minimum tax (AMT) purposes. A farmer had sold his crop and was paid $0.75 on the dollar upon inspection and delivery, with the balance received in the next taxable year. The IRS ruled that, for AMT purposes, farmers must treat the full fair market value of the deferred payment as received in the year of sale.
—Michael Lynch, CPA, Esq., Associate professor of accounting at Bryant College, Smithfield, Rhode Island.

A guide from the PBGC

QDROs Made Simple

T he Pension Benefit Guaranty Corporation (PBGC) has issued Divorce Orders & PBGC, a booklet designed to help attorneys and others involved with pensions understand how to set up and apply qualified domestic relations orders (QDROs) when the PBGC becomes the trustee for a terminated pension plan. The 32-page guide contains instructions for creating QDROs as well as sample orders. "This guide is something every CPA should have if a client is going through a divorce," Greg Matthews, CPA, a principal in G. E. Matthews & Associates, Inc., St. Petersburg, Florida, told the Journal. "The CPA will find a useful discussion on QDROs that's a help to any divorce attorney; it's something he or she might want to pass along."

Matthews outlined a typical problem he hopes the booklet will solve: a nontax divorce attorney often drafts a QDRO to divide a pension to meet the marital separation agreement. After the court approves it, the order is sent to the plan administrator. Neither the lawyer nor the judge may be an authority in the labor and tax implications of a QDRO, so it is possible the order violates provisions of the Employee Retirement Income Security Act (ERISA). The administrator is then stuck between being held in contempt of the judge's order to execute the QDRO and creating a breach of fiduciary duty. Often the problem has to go before another court for resolution, a difficult and time-consuming process.

Basically, in this booklet the PBGC is saying, 'If you follow this wording, your order will go through, and the administrator's life-and yours-will be a whole lot simpler,'" said Matthews.

Beyond PBGC
The guide does not take precedence over Internal Revenue Service or Department of Labor interpretations and was written to apply to plans the PBGC has taken over. However, Matthews believes it will have wider implications. He said the Small Business Job Protection Act, passed in August 1996, requires the federal government to issue sample wording for all QDROs. "Everyone recognizes the need for sample language, and it's very likely the PBGC samples will serve as a model."

Free copies of Divorce Orders & PBGC (publication 1005) are available by calling the PBGC at 800-400-7242. It also can be downloaded from the PBGC's Web site: http://www.pbgc.gov . For more information on QDROs, see Matthews' article in Small Business Tax Solutions, JofA, May96, page 34.

IASC amends standard on income taxes

IASC Amends Standard on Income Taxes and Issues ED on Employee Benefits

T he International Accounting Standards Committee revised International Accounting Standard (IAS) no. 12, Accounting for Taxes on Income. It also issued an exposure draft on accounting for retirement benefits that would replace IAS no. 19, Retirement Benefit Costs.

The revision of IAS no. 12 reduces the number of options companies have when accounting for deferred tax. "Most of the various options in the old standard have been eliminated," said Sir Bryan Carsberg, IASC secretary-general. "The result should be much clearer information for users of financial statements."

Previously, companies accounting for timing differences between taxable profit and accounting profit could choose either the deferral method or a liability method. The revised standard requires companies to use a liability method. "The revised standard is very similar to Financial Accounting Standard Board Statement no. 109, Accounting for Income Taxes, " said Peter Clark, IASC senior research manager. "There are only a few exemptions in FASB Statement no. 109 that are not in IAS no. 12, such as exemptions for hyperinflation in foreign subsidiaries." He said the FASB attended IASC meetings and provided input to help harmonize the FASB and IASC standards. IAS no. 12 will be effective for periods beginning on or after January 1, 1998.

Updating pension regulations
The IASC exposure draft (E54) for retirement benefits is intended to clarify how retirement benefit costs should be treated on the balance sheet. Key proposals of the ED include

Replacing projected valuation methods with a single accrued benefit method.
Measuring defined benefit obligations at each balance sheet date.
Measuring discount rates for both funded and unfunded obligations at the balance sheet date and at the market yield for high-quality, fixed-rate corporate bonds. In countries where such bonds are less frequently used, the yield should match that of government bonds.
Using a 10% corridor for actuarial gains and losses on underlying benefit obligations and any related plan assets. Gains and losses that exceed the 10% corridor must be recognized immediately. This differs from FASB Statement no. 87, Employers Accounting for Pensions, which permits companies to amortize actuarial gains and losses that fall outside the corridor, said Clark.

The International Organization of Securities Commissions (IOSCO) requested that the IASC address postretirement benefits. The IOSCO is expected to endorse IASs for cross-border capital raising and listing for all global markets. This exposure draft is a major step in that direction, said Carsberg. Comments on E54 are due to the IASC in writing by January 31.

Copies of IAS no. 12 (revised 1996) ($24 each) and E54 ($16 each) can be obtained by calling the IASC in London at +44-171-353-0565 or by fax at +44-171-353-0562.

California voters

California Votes Down Proposition 211

V oters in California rejected an initiative on the November 1996 election ballot that would have increased the rewards for class-action securities lawsuits. The Retirement Savings and Consumer Protection Act, or proposition 211, was turned down by 74% of California voters. The proposition had threatened to nullify the reforms achieved by the passage of the Private Securities Litigation Reform Act of 1995 and would have had far-reaching effects on all U.S. publicly traded companies and their CPA firms.

Proposition 211 would have allowed plaintiffs' lawyers to put together class-action claims similar to Securities and Exchange Commission 10b-5 class actions with no statute of limitations and no limits on lawyer's fees. Abusive securities class-action suits, principally under the Federal Rules of Civil Procedure, were sharply curbed under the 1995 reform act. The initiative would have affected all U.S. companies with shareholders in California.

"This was an important victory for the profession," said Andrea R. Andrews of Price Waterhouse in Washington, D.C. "It reaffirms the protection under federal legislation and sends a message to other states considering ballot initiatives like proposition 211 that it would be both costly and futile." Speaking at the American Institute of CPAs Eighth Annual Conference on the Securities Industry, Mario M. Cuomo, former New York State governor, said the vote against class-action lawsuits revealed that Americans were associating their own welfare with the financial well-being of corporations. "This victory was the product of a well-focused effort by the business community and the accounting profession," said Cuomo.

Proposition 211 prompted the costliest campaign ever over a California ballot initiative. The measure was backed primarily by lawyers who file class-action suits and opposed by Silicon Valley companies and the accounting profession. Spending had reached $40 million by October-proponents had spent $9 million while opponents spent $31 million.

GASB will issue reporting model ED

Despite Opposition, GASB Will Issue Reporting Model ED

T he Government Accounting Standards Board expected to issue by the end of January an exposure draft of a new government financial reporting model. The GASB has been developing a new model since its inception in 1984; in June 1995, it released a preliminary views (PV) document, Governmental Financial Reporting Model: Core Financial Statements.

Opposition to the proposed model has grown considerably since the PV's issuance-the GASB received over 230 comment letters, two-thirds of which called for the GASB to either amend the PV or delay the project until recommendations are implemented. However, GASB Chairman Tom Allen told the Journal the board would move forward with the project. "We have looked at all the comments on the PV in great detail and have records of both the comments and our responses to each issue," he said. In the PV "we made many changes to the reporting model that all groups, even those most critical of the GASB, acknowledged would be improvements over current practices."

The PV proposed a dual-perspective presentation for the new model. A fund perspective would present many of the traditional measurements found in the current fund-type model, including additional information for users on the government's major funds. An entitywide perspective would give users an overview to assist them in determining whether a government is better or worse off.

Dianne K. Mitchell, technical manager in the Division of State Audit in Nashville and vice-chairwoman of the Governmental Accounting Standards Advisory Council, said many constituents did not like the PV's proposal for two measurement focuses. "Most constituents like parts of the PV but not all of it." Nonetheless, Mitchell said she expected the GASB to issue the ED as scheduled and then closely examine the second set of comments on the issues.

In March, William J. Raftery, former president of the National Association of State Comptrollers (NASC), sent a resolution from the NASC to the GASB calling on the GASB to cease its work on the reporting model until the Financial Accounting Foundation, GASB's oversight body, reviewed GASB's due-process procedures. Raferty said state and local government preparers and auditors of financial reports believed the GASB had ignored due process as it considered the new financial reporting model.

Allen told the Journal the board had chosen to continue with its PV model, implementing some of the constituents' comments, but there had been too many disparate recommendations to implement all of them in the ED. "The fact that we did not do what all the groups requested does not mean that we did not carefully consider all comments." Allen said the proposed model made such significant changes to government accounting that it included dozens of decisions that could be treated as separate projects. "We expected that a project of this magnitude would be extremely challenging," said Allen.

Copies of the PV (GVO7) are available for $22.50 by calling the GASB order department at 203-847-0700, ext. 10.

GASB Will Add Two New Members

T he board of trustees of the Financial Accounting Foundation (FAF) has voted to increase the number of members on the Government Accounting Standards Board (GASB) from five to seven. FAF chairman J. Michael Cook said the trustees recommended that the positions be filled by a state financial statement preparer and a user of government financial statements. The change will be effective on or before July 1, 1997.

Currently, the GASB requires a simple three-to-two majority to approve a standard. Tom L. Allen, GASB chairman, told members attending the American Institute of CPAs Annual Government Accounting and Auditing Update Conference in August that there had been times when a vote was reversed because only one GASB member had changed his or her mind.

Cook said the two new members would bring "broadened experience to the board and would enhance the GASB's process and the quality of its work on the significant matters it will address in the near future." The board currently is composed of two local government preparers, one state auditor, a representative in public practice and an academic (see below).

The New Structure of GASB

User

1. New member. Financial statement user, such as an analyst, legislator or member of citizen's group.

State government

2. New member. State controller.

3. Tom L. Allen, GASB chairman and former state auditor of Utah.

Local government

4. Barbara A. Henderson. Retired director of finance and city treasurer of Fullerton, California.

5. Paul R. Reilly. Retired finance director and comptroller of Madison, Wisconsin.

Accounting profession

6. Edward M. Klasny. Retired partner of Ernst & Whinney (now Ernst & Young).

Academia

7. Robert J. Freeman. Professor of accounting at Texas Tech University.

Charles Bowsher

Bowsher Named to FAF

A s expected, Charles A. Bowsher, who recently completed a 15-year term as comptroller general of the United States, was elected to a 3-year term as a member of the board of trustees of the Financial Accounting Foundation. The FAF funds, oversees and selects members of the Financial Accounting Standards Board and the Governmental Accounting Standards Board. (See "Bowsher Says Goodbye, Pleased Federal Government Is More Accountable," JofA, Oct.96, page 13).

Before his GAO service, Bowsher had been a partner of Arthur Andersen & Co. and assistant secretary of the navy for financial management. His awards include Beta Alpha Psi's Accountant of the Year and the American Institute of CPAs Outstanding CPA in Government; in August 1996 he was inducted into the Ohio State University Accounting Hall of Fame. He is not completely new to the FAF, having served on both the FASB's and GASB's advisory councils.

Getting a Grip on Intangibles

N ew York University established the Intangibles Research Center at its Stern School of Business to address the growing need for information about corporate investment in intangibles (such as research and development, franchise and brand development and human capital enhancement). The center will help researchers gather data and exchange information with appropriate business executives.

Although investments in intangibles have been growing quickly throughout all developed countries, current accounting treatments make it difficult to, among other things, assess the rate of return of investment in intangibles and determine the value of a company's intangible investments. Accounting standard setters worldwide therefore are finding it difficult to improve disclosures about intangibles.

The center's board of directors includes staff members of the American Institute of CPAs, the Financial Accounting Standards Board and international organizations. The 17-member board also includes representatives from accounting firms, industry and academia as well as observers from the Securities and Exchange Commission.

The center invites both academics and practitioners considering, or currently engaged in, intangibles research to submit three-to-five-page proposals stating objectives, methodology and needs, such as access to corporate data and funding. All correspondence and queries should be addressed to the center's director, Professor Baruch Lev, Stern School of Business, 40 West 4th Street, New York, New York 10012; phone: 212-998-0028; fax: 212-995-4004; e-mail: blev@stern.nyu.edu .

Companies are offering

Companies Offer More Than Money

A wide variety of work-life and diversity programs are now prevalent in many companies.

Companies offering the following:

Source: William M. Mercer survey of 800 companies, with nearly 7 million employees combined.

NASBA holds annual meeting

Accountancy Boards Target Reciprocity at Annual Meeting

By Louise Dratler Haberman

Louise Dratler Haberman is NASBA's manager of member services and editor-in-chief of its State Board Report.

R esponding to the reciprocity concerns raised by the joint AICPA/ NASBA committee on regulatory structure, the National Association of State Boards of Accountancy launched an initiative to help make the CPA license more transportable across state lines. NASBA's leaders urged the more than 250 attendees at the association's 89th annual meeting to look at the credentials of CPAs seeking reciprocal licenses with an eye to substantial equivalence. Even when there may be significant differences between states' requirements, if an individual licensee meets the requirements set out in the Uniform Accountancy Act (UAA), he or she should find it relatively easy to obtain a reciprocal license under a new rule being proposed for adoption by the state boards.

The state boards were asked to adopt the following rule, which had been approved in principle by the NASBA board of directors: "For purposes of reciprocity, an applicant having a valid unrevoked license to practice as a certified public accountant from any jurisdiction and who has obtained from NASBA verification of compliance with the Uniform Accountancy Act's CPA registration requirements shall be presumed to have qualifications substantially equivalent to this state's."

NASBA UAA committee chairman Gerald Burns encouraged meeting attendees to win support for the concept from their state boards, check with their legal counsel to see how it could be implemented and then adopt the rule. Members of his committee will meet with individual state boards to discuss how the rule can be put into practice. Burns explained the idea was to develop a "seamless approach" to reciprocity-to allow the boards to accept credentials from other jurisdictions without extensive checking requiring duplicate detailed applications from licensees.

Though coordinated action was called for, NASBA leaders made it clear that licensing and discipline would remain with the individual state boards. NASBA incoming chairman John M. Greene said, "The state boards own the CPA designation." He disagreed with the idea that some services performed by CPAs should not be regulated by the accountancy boards-"Shouldn't everything a CPA does be regulated at least to the extent of conduct and competency?"-and stressed the need for public confidence in all services rendered by a CPA.

"Most state boards regulate only attest now. However, the concept of 'acts discreditable' to the profession means these boards ultimately regulate all areas of a CPA's practice," Greene said. "This concept changes to fit the circumstances as market forces open new services for CPAs." Greene challenged the need for "creating a level playing field" since CPAs are not being hindered in the marketplace under the current system of accounting regulation.

CPAs must respond to market
"We are entering a decade of enormous and rapid change in accounting and assurance services," Ronnie Rudd, outgoing NASBA chairman told the state board representatives meeting in San Antonio, Texas. "Unless NASBA and the AICPA respond rapidly, neither organization will be around in 10 to 20 years. That is our challenge."

Rudd alluded to the future services identified by the American Institute of CPAs special committee on assurance services, the online electronic hookups that are bringing professionals across state lines and CPAs' use of the Internet for advertising. He underscored the need for the accountancy boards to develop effective strategies for addressing these areas.

Robert Mednick, chairman of the AICPA board of directors, presented some differing views to the regulators, urging them to rethink which areas require regulation and suggesting oversight is required only where the public interest is the greatest. Mednick had outlined his thoughts in "Licensure and Regulation of the Profession: A Time for Change," JofA, Mar.96, page 33.

"We need to find a way to differentiate between the credential and the license," Mednick said. He identified the following changes as necessary to help CPAs become independent information professionals:

A more focused regulatory scheme that emphasizes areas with the greatest public interest and avoids creating unnecessary barriers to CPAs' performing other services in an increasingly competitive marketplace.
A change in the education (both university and continuing professional education) of practitioners.
New assurance services to jump-start the broader 21st century practice.
The creation of a new image for the profession so CPAs have the 'permissions' to successfully perform new and expanded information services."

Expanding on Mednick's comments, AICPA President Barry Melancon explained that services being offered by CPAs can be thought of as falling into two buckets, one holding traditional services and the other new services that are truly between just two parties. It is the two-party services that he maintains should be free from the most intense regulatory function.

This more limited view of regulation was not supported by the statistics presented by NASBA President David Costello. According to the electronic polls conducted at the AICPA spring council meeting and NASBA's June regional meetings, both the AICPA and NASBA respondents agreed CPAs who perform services also performed by non-CPAs should be regulated (76% agreement at the NASBA meetings and 61% at the AICPA council meeting). Costello highlighted the similarities and differences between the two organizations' responses: While 85% of NASBA respondents and 91% of council members said reform efforts should receive highest or moderate priority, both groups favored the current regulatory system, with uniformity, over any other proposed combination of regulatory and licensing bodies.

Rudd gave the audience an update on the work of the joint committee on regulatory structure, saying there was some agreement on using the concept of substantial equivalence, but "the devil is in the details." The joint committee is considering issues such as nonlicensee ownership of public accounting firms, which Rudd said cannot be ignored as the courts and state legislatures continue to look at them as well. He assured the state board representatives that no decisions would be made by the joint committee without first bringing the proposals to the state boards. If necessary, a special meeting will be called for this purpose.

Foreign comparisons
Representatives from the United Kingdom and Canada explained how similar issues were being handled by their professionals. Anyone can offer general accountancy services to the public in the United Kingdom and Ireland, reported Roger Lawson, chairman of the Chartered Accountants Joint International Committee; however, three areas are restricted to individuals meeting specific requirements: statutory auditing, investment banking and insolvency practice. He also said that while U.S. CPAs are concerned about the portability of their license within their own country, British CAs currently are implementing measures for free movement of professionals throughout the European Union member states. Lawson said CAs are becoming information professionals and, following a common core of courses, are training for specialist designations after they qualify as CAs.

Michael H. Rayner, president of the Canadian Institute of Chartered Accountants, told the NASBA audience about the results of the CICA's future-oriented study: "Our vision is that accountants should be leaders in creating, validating and interpreting information that measures and enhances organizational performance and should be the obvious choice for financial management, assurance and other specialized services." He said the challenge of the profession "is to reinvent ourselves."

Future services
Before detailing what services the profession is expected to be offering, NASBA past president Sandra Suran, a member of the AICPA special committee on assurance services, reminded the attendees of NASBA's first strategic plan, developed some 15 years ago when she led NASBA. It encouraged the organization to take a proactive position "to identify trends as they emerge, before they become disasters." Calling accounting today a profession "in transition," that is seeking to serve its clients' needs more completely, Suran quoted one user of CPA services who said of financial reporting: "The current system is like timing your cookies with a smoke alarm." The profession needs a process for developing and introducing new products constantly, and "NASBA must assure attest services are a strong, regulated part of the new services being offered," Suran advised.

Internet issues
Regulators in many professions feel "the ground is changing under us," Sarah Blake, NASBA's incoming vice-chairman, commented. "I would argue that change is here. How do we protect the public when a practitioner is servicing a client as far as 5,000 miles away?"

Blake noted that via the Internet people from other countries are assuring potential financial services clients that their work conforms to "local GAAS and GAAP." She said she did not realize there were such things as "local" GAAS and GAAP. She advised those state boards that have prohibitions on advertising that those prohibitions are being violated on the Internet.

"There is a point where you have to be able to reach a person and have some impact. How do we harmonize our regulations in these instances where you have work being sent to a client by a CPA that is beyond your jurisdiction's boundaries?" she asked. Blake recommended that the boards pair themselves with other professional regulators in their states, such as the medical boards, to approach their state legislators on the common issues involved in telepractice.

Other issues
During the annual meeting NASBA presented the William H. Van Rensselaer Public Service Award posthumously to Richard J. Goode. He had been NASBA president-elect in 1991 when he was struck down by an automobile. Goode, managing partner of the Salt Lake City office of Coopers & Lybrand, had spearheaded the development of the NASBA National Registry of CPE Sponsors.

Drawing the meeting to a close, Greene identified issues that NASBA will consider during his year in office. These included: nonlicensee ownership of public accounting firms; determining which services need to be regulated; coordinating ethics requirements; developing a central recordkeeping system including examination grades, experience and education information to facilitate licensees' mobility; reconsideration of the "holding out" concept and "acts discreditable" provisions; achieving reciprocity with the United Kingdom; and bringing the states together through the concept of substantial equivalence.

NASBA's 90th annual meeting will be held September 21-24, 1997, in Maui, Hawaii.

SAS no. 80

New SAS Likely to Affect All Auditors

T he American Institute of CPAs auditing standards board has recognized that audit evidence that previously existed primarily in documentary form often exists now in the form of electronic file images. The ASB has just issued Statement on Auditing Standards no. 80, Amendment to SAS no. 31, Evidential Matter, to provide guidance to auditors in handling engagements in an electronic world. Because entities from large multinationals to corner candy stores to nonprofits use information technology or have information in electronic form, this SAS will affect almost every auditor.

James E. Brown, chairman of the electronic evidence task force and a former member of the ASB, told the Journal that the move from paper to electronic files presents the auditor with several problems: "With an original paper document, there is a degree of presumption of authenticity you don't have with an electronic file. Also, if you access an electronic database, what assurance is there that you are getting everything, that there isn't hidden information?" He also pointed out an alteration on a paper document is often detectable, while it can be virtually impossible to detect a change in an electronic file.

How audits will change
SAS no. 80 is designed to help the auditor focus more on electronic evidence. According to Brown, the most significant change from SAS no. 31 is how risk is handled in an electronic environment. SAS no. 80 says in entities where a significant amount of information is "transmitted, processed, maintained or accessed electronically," it may be impractical or impossible to reduce detection risk to an acceptable level by performing only substantive procedures. In such circumstances, tests of controls normally would be performed to obtain evidence that would enable the auditor to achieve an assessed level of control risk sufficiently below the maximum. That evidence, when combined with evidence obtained by performing substantive tests, may constitute sufficient evidential matter to enable the auditor to express an opinion. If unable to obtain sufficient evidential matter, the auditor must either qualify or disclaim an opinion because of the resulting scope limitation. Brown said this SAS may encourage entities using electronic information to review and improve the effectiveness of their controls.

Another important change is the recognition that electronic evidence may exist or be accessible only at a certain time; electronic files may change quickly and backups may not exist. "The auditor has to consider the time during which electronic information exists or is available in determining the nature, timing and extent of auditing procedures," said Brown. "Some entities have real-time processing; each iteration changes the preceding one, which may not be retained."

A multidisciplinary approach
The electronic evidence task force comprised auditors and information technology (IT) specialists. In fact, Brown said the project actually started as a white paper presented to the ASB by the AICPA IT executive committee. IT increasingly is affecting other areas of accounting (see "New Millennium Is Cause for Concern," JofA, Oct.96, page 15).

The AICPA also is releasing an auditing procedure study (APS) prepared by the task force. It provides nonauthoritative, user-friendly guidance on the characteristics of evidence, differences between paper and electronic evidence and unique audit implications of electronic evidence. It also includes two case studies illustrating how an auditor might address the risks and challenges of auditing the financial statements of an entity in an electronic environment. The auditing procedure study is expected at the end of this month. SAS no. 80 (product no. 060673JA) is available now. To order, call the AICPA order department at 800-862-4272.

New SAS on Investments Parallels FASB Statements

T he American Institute of CPAs auditing standards board updated its guidance on investments in Statement on Auditing Standards no. 81, Auditing Investments. The new SAS supersedes AU section 332, "Long-Term Investments," of AICPA Professional Standards and deletes Interpretation no. 1 of AU section 332, "Evidential Matter for the Carrying Amount of Marketable Securities."

"Our goal was to update the auditing literature to address the recent Financial Accounting Standards Board pronouncements that cover investments: Statement no. 115, Accounting for Certain Investments in Debt and Equity Securities, and no. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations," George F. Patterson, Jr., chairman of the task force that drafted SAS no. 81 and a former ASB member, told the Journal. He said the new SAS lets auditors "enter the 115/124 world," providing guidance on areas such as evaluating management's intent related to an investment and an entity's ability to hold a debt security to maturity.

Scope
SAS no. 81 covers securities as defined by Statement nos. 115 and 124, and investments accounted for under Accounting Principles Board Opinion no. 18, The Equity Method of Accounting for Investments in Common Stock. It does not cover derivatives, even though a derivative might meet the definition of a security; however, it does provide some helpful guidelines, according to Patterson.

A more complete discussion will appear in an article in the February Journal . SAS no. 81 is available from the AICPA order department by calling 800-862-4272.