Senate Takes Steps to Rein In FASB
When the U.S. Senate held hearings on derivatives accounting last fall, Senator Phil Gramm (R-Texas) said the last thing he wanted was congressional involvement in setting accounting standards. But Senator Lauch Faircloth (R-N.C.) has introduced a bill that directly affects accounting standards. The Accurate Accounting Standards Certification Act of 1997 (S 1560) essentially absolves banks from any Financial Accounting Standards Board statements on derivatives unless the appropriate federal banking agency certifies that the FASB standards would (1) help the entity more accurately reflect assets, liabilities and earnings and (2) not diminish the use of risk management practices. In introducing the bill, Faircloth said, In my view, the new standards will throw a wrench into the present accounting rules that will only serve to confuse investors.

Were disappointed that the bill was introduced and were sorry to see this has happened, FASB Chairman Edmund Jenkins told the Journal . He expects he will have an opportunity to discuss the bill with Faircloth and his staff in the future. Congressman Richard H. Baker (R-La.) said he planned to introduce legislation to delay the statements implementation. The FASB had not yet seen Bakers proposed legislation at Journal press time and so could not comment on it specifically, but Jenkins expressed concern over both bills possible impact on the boards independence and objectivity.

In mid-December, the board was still considering comment letters and did not expect to issue a final statement by yearend. We want to make sure that we do a high-quality job, and to do that well have to spend some more time considering the issues, Jenkins said. The primary goal is not to get it out, but to create a quality document. The boards estimate for publication is now late March.

However, the board announced a change in the effective date of the proposal: For calendar-year companies, the standard would be effective January 1, 2000. The previous date was December 15, 1998. The later date will give entities more time to change their systems, according to a statement from the board.

The Senate bill, approximately two pages, can be downloaded from the federal governments THOMAS Web site ( http://thomas.loc.gov/home/thomas.html ).

Materiality Out in Postretirement Statement
The Financial Accounting Standards Board issued a new statement, Employers Disclosures about Pensions and Other Postretirement Benefits , which changes disclosure rules for public and private companies. (See Postretirement ED Reforms Disclosure Rules , JofA, Aug.97.) The key change from the exposure draft is the elimination of the materiality test, according to FASB Practice Fellow Mark Neagle. The ED said certain nonpublic companies might be allowed to use a reduced disclosure set. The final statement makes a simple publicnonpublic distinction, however. The board believes the more rigorous disclosure standards provide greater information but recognizes some information just isnt useful to everyone. Only public companies are required to make a full set of disclosures.

Another significant change from the ED, according to Neagle, deals with the drafts elimination of some requirements in Statements no. 87, Employers Accounting for Pensions , and no. 106, Employers Accounting for Postretirement Benefits Other Than Pensions , to present the components of benefit cost. Some comment letters suggested that in our effort to eliminate certain disclosures, we were going overboard, so those provisions have been reinstated in the final statement.

Sensitivity remains sensitive
When the board approved the ED, the staff suggested that sensitivity analysis would prove the most controversial aspect of the statement, and according to Neagle, that was the case. The ED proposed disclosure of the effects of an increase and decrease in the long-term health care trend rate. Some who commented wondered whether that was useful information, said Neagle. However, the board believes that this disclosure is important, and, accordingly, it remains in the final statement.

This statement is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. To order a copy, call the FASB order department at 203-847-0700, ext. 555.

©1998 AICPA

Reports for Specified Parties
The American Institute of CPAs auditing standards board issued a proposed Statement on Auditing Standards, Restricting the Use of an Auditors Report , that provides guidance to auditors on restricted-use reports. A reports use should be restricted to specified parties if

• The subject matter of the report, or the presentation being reported on, is based on measurement or disclosure criteria contained in contractual agreements or regulatory provisions that are not in accordance with generally accepted accounting principles or an other comprehensive basis of accounting.
  
  
• The report is based on procedures specifically designed and performed to satisfy the needs of parties who accept responsibility for the sufficiency of the procedures.
  
  
• The report is issued as a by- product of a financial statement audit and not to provide assurance on the specific subject matter of the report. Examples are reports issued under SAS no. 60, Communication of Internal Control Related Matters Noted in an Audit , SAS no. 61, Communications With Audit Committees , and paragraphs 19-21 of SAS no. 62, Special Reports .

The proposed SAS will help auditors determine whether an engagement requires a restricted-use report and how to draft that report, AICPA Technical Manager Judith Sherinsky told the Journal . If approved, the statement will be applicable for reports issued after June 30, 1998, with early application permitted. Copies of the ED are available from the AICPA and may be downloaded from AICPA Online, http://www.aicpa.org. Comments are due in March.

©1998 AICPA

GASB Issues Technical Bulletin and Interpretation
The Governmental Accounting Standards Board published a new technical bulletin on deposits and investments for certain bank holding company transactions, as well as a new interpretation on recognizing property tax revenue.

Technical Bulletin (TB) no. 97-1, Classification of Deposits and Investments into Custodial Credit Risk Categories for Certain Bank Holding Company Transactions , clarifies certain provisions of GASB Statement no. 3, Deposits with Financial Institutions, Investments (including Repurchase Agreements), and Reverse Repurchase Agreements . It explains how, depending on certain sets of circumstances, deposits and investments with bank holding companies should be classified under the custodial risk categories in Statement no. 3. It is effective for years beginning after December 15, 1997.

Copies of TB no. 97-1 (code no. GTB01; $6 each) and Interpretation no. 5 (code no. GI05; $8.50 each) are available from the GASB order department by calling 203-847-0700, ext. 555.

©1998 AICPA

Top 10 Technologies Stress Communications

Its not just something for everyone; its everything for everyone, as the American Institute of CPAs information technology committees issue their annual list of the key technologies affecting CPAs. Sandi Smith, who participated in choosing the technologies as a member of the IT executive committee, said, Whats interesting about this years list is that every item affects every CPA in the largest or smallest firms and companies. Last years list included electronic data interchange (EDI), for example, a technology only larger companies use. EDI has slipped to 20th on this years list.

Communications-related technologies fill most of the top 10 spots, including number 1. In fact, another participant, Gene Prescott, said that items 5 through 10 can be considered subsets of item 1, emphasizing the importance of the Internet and its offspring. Prescott, chairman of the tax technology committee, thought Internet-related solutions might be responsible for pushing image processing and document management off the list altogether, although this has been high on the list for years. Although there havent been significant breakthroughs in this area, the need is still great. Image processing has been viewed as a key component of the paperless office.

Prescott was pleased that he was joined at this years voting by several other tax accountants for the first time, giving more tax-related input into the decision-making process.

The Top 10 for 1998
The 10 chosen for this year follow. For past-year comparisons, see JofA, Feb.97 , and JofA, Jan.96.

1 Internet, intranets, private networks and extranets. Almost everyone knows what the Internet is, but many people are less familiar with its related technologies. Intranets are essentially private Web sites that only employees within a company, for example, can access. Companies are finding them useful for sharing information quickly and inexpensively. In fact, Smith said some companies have seen a 1000% return on investment on their intranets. Private networks include local areas networks (LANs), consisting of workstations sharing the resources of a single server, often just within an office building; wide areas networks (WANs), which can include public networks; and metropolitan area networks (MANs), which fall somewhere between LANs and WANs. Also included are virtual private networks (VPNs), which work like WANs that run through the Internet. John Gill, a member of the tax technology committee, said companies with employees in the field find them useful because they allow the staff to communicate with the home office at reduced cost. VPN software will replace multiple phone lines and banks of modems at a companys headquarters, he said.

An extraneta growing technology still unfamiliar to manyis a method for two companies, such as two contractors on one project, to collaborate over the Internet. In effect, two intranets connect with each other and employees use the same off-the-shelf Web browsers to access the other companys data. Extranets can connect an intranet to suppliers and trading customers, even customers.

2 The Year 2000 Issue. The problems expected to occur when two-digit software codes change from 99 to 00 have been widely discussed in the popular press and technical journals. These issues present problems as well as consulting opportunities for CPAs. (See JofA, Dec.97, , for a thorough discussion, including a sidebar listing AICPA resources.)

3 Security and controls. These issues remain on the list from last year and continue to be a concern for companies wanting to conduct business over the Internet. Can sensitive corporate data and customer credit card numbers be kept private? New since last year is the introduction of the CPA WebTrust seal, which provides a marketable security feature for companies trying to establish an online sales outlet. (See In CPAs We Trust , JofA, Dec.97.) Also involved are software encryption techniques, some of them so effective that the federal government bans their export, to the frustration of multinational companies.

4 Training and technology competency. IT executive committee chairman Gary Boomer repeatedly has said that only 30% of a companys IT investment should be in hardware and software; the rest should be in training. For example, as a company moves into a paperless environment, obscuring the usual audit trail, both the internal and independent auditors will have to become more comfortable in an electronic financial environment.

5 Electronic commerce. Rising from number 7 last year, this item refers to business conducted using a public network, such as the Internet, or a private network. Included are e-mail, electronic funds transfer, electronic publishing and online banking. Many of these technologies are related to the paperless office. Although electronic commerce can lead to more efficient processes, it also can create problems. For example, paper audit trails can disappear, as noted in item 4.

6 Communications technologiesgeneral. The key word in this area is bandwidth the size of the pipe through which data travel. Technologies range from POTS (plain old telephone service) to cable lines, which may revolutionize the Internet by allowing much quicker access to the Internet than standard phone lines.

7 Telecommuting/virtual office. New communications and computer technologies are making it possible for employees to stay at home and still perform their jobs. A company that sends everyone home and no longer has a fixed, physical space is a virtual office, existing on the Internet and in a series of home offices. (The AICPA has just published Creating a Virtual Office: Ten Case Studies for CPA Firms , product no. 090426JA.)

8 Mail technology. E-mail has simplified many tasks for CPAs. For example, tax practitioners can send and receive client data as attached files. Because this makes it easier for even sole practitioners to set up multistate practices, many CPAs are pushing for regulatory changes to match the technological advances.

9 Portable technology. This item includes notebook and palmtop computers, such as the Palm Pilot. Microsoft has a special version of Windows called Windows CE that runs its word processing and spreadsheet software. Hewlett-Packard and Casio are among a number of companies manufacturing CE computers that can fit in a jacket pocket. Some handheld computers allow users to make handwritten notes on them with a pen. Many portable computers come with modems, so users can stay in touch from hotel rooms and even airplanes. Portable communication devices, such as cellular phones, also fall into this category.

10 Remote connectivity. Related to items 7 and 9, this refers to the technologies that connect multiple offices to each other or to workers at home or on the road. For example, with the use of a small video camera and inexpensive programs, far-flung employees can hold a video conference in real time using the Internet. Not only is this more personal than a phone but it also cuts the long-distance phone bill.

The AICPA will post more details on these technologies on AICPA Online, http://www.aicpa.org/members/div/infotech/top1098.htm . Also, Sandi Smith has written a new edition of her top technologies book, 1998 Top 10 Technology Opportunities: Tips and Tools , tentatively priced at $19.95 (product no. 042300JA).

©1998 AICPA

CPAs Get TV Exposure
What does a prominent CPA have in common with Jim Lehrer, Russell Baker and Mr. Rogers? Theyre all on PBS. The American Institute of CPAs is underwriting Finding Financial Freedom , an hour-long television program featuring Jonathan Pond, a nationally known financial planner. The Institutes personal financial planning executive committee unanimously agreed that the distribution of the program on public television would be an effective way of promoting the CPA/PFS designation.

In a videotaped segment that airs in the middle of the program, AICPA President Barry Melancon tells viewers that the program is supported by local CPA personal financial specialists and asks the audience to support public TV. Two additional 20-second underwriting credits feature the CPA/PFS logo and display a new toll-free number (888-999-9256) that viewers can call for a free CPA/PFS list and a brochure, Guide to Choosing a Personal Financial Planner .

The program started airing in December and will continue through March 1999 on as many as 300 stations nationwide.

Moderate salary gains are forecast nationwide for accounting and finance professionals in 1998. However, these increases will be more significant for CPAs with hard-to-find skills and experience. Starting salaries are projected to rise by an average of 3.1% this year, up from a 2.3% increase in 1997.
Here is more on expected salaries for 1998.

Source: Robert Half International, Menlo Park, California.

©1998 AICPA

Plan Reporting Controversy
The Department of Labor has proposed revising form 5500 to reduce the reporting requirements for plan sponsors. Sponsors still would have to maintain the same information as before and make it available on demand but would not have to attach it to the form. Pension rights advocates are protesting what they see as a loss of information. Rebecca J. Miller, a member of the AICPA employee benefit plans committee, spoke with the Journal about the pros and cons of each sides position.

On the committee, we agree that plan participants need access to meaningful information. But in most plans, some of this information is not particularly meaningful, said Miller, referring to two schedules the DOL proposed to eliminate. One is the schedule of assets held for investment purposesthis applies to large plans subject to audits. Such plans already have to disclose in footnotes any assets representing at least 5% of the plan, she said. Although, theoretically, a highly diversified plan could have no assets in this category, Miller said this probably would be rare.

The second schedule is for reportable transactions, which essentially says that if there are any purchases or sales of an investment type where the transaction is more than 5% of the asset value, that transaction must be disclosed. Miller said this information would be obvious in a participant-directed 401(k), for example, but not necessarily in other plans. However, auditors would look for this in a full-scope audit. Although a limited-scope audit would not cover this area, presumably fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA) are responsible for certifying investment activity.

Alternatively, the same rules currently found in ERISA regulation 2520.103-11(b)(2) could be applied. This regulation already reduces the reporting responsibility for ERISA schedule of assets bought and sold during the plan year by eliminating, for example, any transactions in government securities, registered investment companies (mutual funds), certain bank certificates of deposit, participations in a bank common or collective trust or insurance company pooled separate accounts and traded securities purchased through a registered broker/dealer.

©1998 AICPA

Arthur Siegel, former partner and vice-chairman of auditing and business advisory services at Price Waterhouse, is the full-time executive director of the recently formed Independence Standards Board. In addition to having served as chairman of the American Institute of CPAs SEC practice section executive committee, he was chairman of the accounting standards executive committees task force on risks and uncertainties and a member of the Financial Accounting Standards Board emerging issues task force.

In his new position, Siegel will be working closely with the Securities and Exchange Commission. The SEC is effectively delegating to the ISB the responsibility for setting independence standards for auditors of public companies, Siegel said. The commission retains oversight authority over the ISB and has a seat at the table at meetings of the board and its independence issues committee, a nine-member group designed to help the ISB address emerging issues in auditor independence.

According to Siegel, the ISB has adopted the current SEC published independence rules, which remain in effect until the board modifies or changes them. The ISB staff also will provide guidance on the application of the independence rules. Practitioners and others can contact the board at the ISB, 1211 Avenue of the Americas, 6th Floor, New York, New York 10036; phone: 212-596-6133; fax: 212-596-6137. A Web site, http://www.cpaindependence.org , is planned.

Suttons office was directly involved in many of the more controversial accounting issues in the past two-and-a-half years. He worked closely with SEC Chairman Arthur Levitt, Jr., and senior members of the accounting profession in establishing the Independence Standards Board, a private-sector body charged to create, codify, amend and preserve independence standards for auditors of public companies. Sutton publicly supported the Financial Accounting Standards Boards controversial financial instruments project, which would require companies to report the fair-market value of derivatives on their balance sheets. He also urged the International Accounting Standards Committee to pursue more robust international standards for cross-border listings.

Levitt said in a release that Suttons work with the SEC would be long-lasting. Sound markets are the result of fair and rigorous accounting standards, which Mike has espoused and fought for throughout his career, said Levitt.

Before joining the SEC, Sutton was national director of accounting and auditing professional practice for Deloitte & Touche in Wilton, Connecticut. He was with the accounting firm for 32 years.

Special Report

Regulatory Reform at NASBA Meeting
How can states effectively regulate professional practice that, thanks to the Internet, takes place in their jurisdictions in a matter of only nanoseconds? That is the challenge Sarah G. Blake, 1997-98 chairwoman of the National Association of the State Boards of Accountancy, presented to her colleagues at the 90th Annual NASBA meeting in Maui, Hawaii, last fall. The third edition of the Uniform Accountancy Actrecently issued jointly by NASBA and the American Institute of CPAscontains the answer, but the documents break with the status quo has caused many regulators to reconsider what regulation is supposed to achieve.

Milton Brown, a member and former chairman of NASBAs UAA committee, explained that the new UAA seeks to codify the concept of a CPA is a CPA. Anything a CPA does, within any practice, comes within the purview of a state board of accountancy. In addition, as the UAAs substantial equivalency provisions come into play, licensees also would agree to be under the jurisdiction of the boards where they are practicing temporarily. Although a licensee would be required to hold a license only where his or her principal place of business is located, the remote state would be given the power to discipline as well.

Brown said, We have proposed that NASBA serve as a clearinghouse for substantial equivalency, notifying a jurisdiction of the licensees who anticipate working within its borders. He said some states fear the single-license concept would drain revenues and their own licensees would have to bear all the costs of disciplining out-of-state practitioners. However, he pointed out, The UAA does not say anything about fees that a board may charge upon notification of a persons practicing in its borders.

The message that Brown and other speakers delivered was that the UAA is a model from which the states can select what suits their own needs. NASBA 1996-97 chairman John M. Greene called the UAA a suggestion and advised the states to take only what they need from the new UAA.

Panelists from four accountancy boards were asked to give their opinions about the new UAA. Their views differed dramatically. Patrick D. McCarthy from Louisianas board asked, How do I improve the regulation of the profession by weakening the standards?

Ohios Sheila M. Birch said she had been troubled by issues of substantial equivalency and nonlicensee ownership of CPA firms. However, she said, there is no way back. The world marketplace will simply run over us. Does she agree with every word of the UAA? Maybe not. But it is a defensible, coherent document.

The Texas State Board of Public Accountancy had voted to support the changes, reported Texas board chairman K. Michael Conaway, with reservations about nonlicensee ownership and regulation of assurance services. Because there have been no reports that nonlicensee ownership has hurt the public, he admitted the time for opposing nonlicensee ownership may well be past. Some CPAs have said that assurance services separate from the attest function need not be regulated. Conaway responded, If CPAs are going to trade on the title of CPA, then they have to accept regulation. Conaway advised the regulators to work with change in the profession much as cowboys do with a stampede: Turn it in the direction that makes sense.

The UAAs strongest support came from Denise Devine, chairwoman of the Pennsylvania board, who had served on the AICPA special committee on regulation and structure of the profession (the Mingle committee). She said, This is a moving train. Change is happening. In particular, she supports the substantial equivalency concept because she believes the process will free up the boards resources to pursue positive enforcement, which is where the public interest lies.

Promoting change
Several speakers reported on changes that bolster the more innovative sections of the UAA. For example, nonlicensee ownership of CPA firms had been discussed for years by the state accountancy boards, but few jurisdictions have set down any regulatory rules. Now the boards need to consider new organizational formats. James T. Martin, chairman of Ohios board, and Timothy D. Haas, the Ohio boards executive director, described 10 conditions the board had determined were needed for a firm that is associated with a nonlicensee-owned corporation to be in compliance with the states current laws:

1. Maintaining separate business identities.
2. Maintaining distinct operations.
3. Establishing different names.
4. Notification of the relationship and identities to clients.
5. Preparing separate engagement letters for all clients.
6. Distributing proportionate income/profit payments.
7. Prohibiting the business services firm from becoming an accounting client of the CPA firm.
8. Observing limitations on the acceptance of contingent fees.
9. Observing limitations on the acceptance of commissions/referral fees.
10. Adhering to appropriate quality review protocols.

NASBAs legal counsel, Noel Allen, summarized some recent court decisions. While cautioning the boards to reassess their core statutes to accurately express how they relate to the public interest, he also advised them not to overreact to the 11th Circuit Court of Appeals decision in Stephen M. Miller and American Express Tax and Business Services, Inc. v. George Stuart, et al . (See Florida First Amendment Case Settles Little , JofA, Nov.97.) Although the court had held that Miller involved commercial free speech, Allen said, evidence could be presented that would convince the court the basic issue is the boards authority to regulate its licensees, which would result in a reversal of the decision. He pointed out that, in a similar situation, the 9th Circuit Court had held in Johnson v. California Board of Accountancy that when a board prevented someone from calling himself a CPA when accepting commissions, the board was regulating conduct, and it was not a free speech issue.

However, when Stuart Kessler, incoming chairman of the AICPA board of directors, took the podium, he mentioned the Miller cases litigants, changes in scope of practices and practice across state lines as factors working to alter the profession. He discussed how NASBA and AICPA leaders had cooperated in the joint committee on regulation of the profession to keep control of the professions future.

NASBA does not control the state boards, and the AICPA does not control the state CPA societies, Kessler said. It is the proper role of our organizations to provide leadership, especially as technology continues to change practice.

New chairwoman, technology focus
Agreeing that technologyespecially the Internetwas altering the practice and regulation of accounting, Blake questioned how you regulate in a system that doesnt represent time and place.

She encouraged the boards to simplify license renewal and application processes without lowering their standards. Increased use of the Internet and e-mail can help in this process, and she noted that recent graduates are accustomed to communicating electronically. We are very fortunate to be overseeing a profession that likes to follow rules, a profession that has a long history of disciplining itself.

Also, she said, we are a profession that prides itself on its independence. The recent formation of the Independence Standards Board (ISB) by the Securities and Exchange Commission and the AICPA has drawn the attention of regulators. Blake said NASBAs ethics committee would be prepared to comment on the ISBs efforts.

SEC Commissioner Isaac C. Hunt, Jr., also discussed the ISBs formation and purpose. He explained that while it had been suggested that the accounting profession take the lead in establishing and improving auditor independence, these arguments did not convince us that we should turn over primary responsibility on these issues to the exclusive control of the profession.

Although he has high hopes for the ISB, Hunt said, the ISBs existence will not impair the SECs ability to exercise its authority. According to Hunt, if the ISB cant meet its mission, the commission may consider other alternatives.

Looking at competencies
State boards are looking at competency issues related to entry-level experience and continuing professional education. NASBAs Pacific Regional Director, Gerald Burns, described the new experience qualification implemented by the Oregon state board. After hearing from the state society that the CPA candidates opportunities for obtaining audit experience were dwindling, the state board developed a way to consistently apply their current standards. They identified seven core competencies CPAs demonstrate in all their responsibilitiesnot just those related to attest services:

1. An understanding of the Code of Professional Conduct.
2. The ability to assess the achievement of an entitys objectives.
3. Experience in preparing working papers that contain sufficient relevant data to support analysis and conclusions.
4. Understanding transaction streams and information systems.
5. Risk assessment and verification skills.
6. Decision making, problem solving and critical thinking in the context of analysis.
7. The ability to communicate scope of work, findings and conclusions.

Under the Oregon plan, a CPA, acting as a mentor for the applicant, fills out a one-page form for each of the competencies acquired, Burns explained. Although the applicant is responsible for developing an appropriate experience portfolio demonstrating his or her attainment of the seven core competencies, the mentor owes due diligence to the board of accountancy.

Nita Clyde, who chaired the NASBA CPE advisory panel, discussed how attaining competencies is the standard being considered by the educational community as well. Clyde identified three characteristics of meaningful CPE: (1) It is part of a lifelong program of learning, (2) it is relevant to what CPAs do at work, (3) it is a way of assuring that CPAs are constantly competent.

She described a pilot project, being conducted at the request of the AICPA subcommittee on CPE standards, aimed at determining whether it is possible for CPAs to set goals for themselves and then use self-assessment tools to determine where they are in terms of the competencies they need to develop. According to Clyde, the development of CPE standards is an ongoing process in which NASBA and the AICPA are jointly engaged.

Award
Recognizing outstanding leadership in the regulation of the profession, NASBA presented its 1997 William H. Van Rensselaer Public Service Award to Jerome A. Schine, CPA, 1989-90 NASBA president, for his leadership of NASBA, the Florida Board of Accountancy, and the CPA Examination Services Corporation. Among his many services to the regulatory community, Schine chaired a task force of the Florida board that recommended permitting nonlicensee ownership of CPA firms a decade ago.

Louise Dratler Haberman, editor-in-chief of NASBAs State Board Report and manager of member services.

SEC Fills All Commissioner Positions
The Securities and Exchange Commission added two new commissionersLaura Simone Unger and Paul R. Carey, who were sworn in last November. Ungers position on the SEC had been vacant for three years and Carey replaces Steven M. H. Wallman, who left the commission last September. Five commissioners, including SEC Chairman Arthur J. Levitt, Jr., sit on the SEC. The remaining members are Norman S. Johnson and Isaac C. Hunt.

All commission members are appointed by the U.S. president, with the approval of the Senate. Terms are staggered and no more than three members may be from the same political party.

Unger occupies one of the Republican seats. Preceding her SEC appointment, she was counsel to the Senate Committee on Banking, Housing and Urban Affairs, advising the committee chairman, Senator Alfonse M. DAmato (R-N.Y.), on legislative issues related to banking and securities. Earlier, Unger had been an attorney in the SEC Enforcement Division. Her term expires in June 2001.

Before joining the SEC, Carey, a Democratic commissioner, was White House special assistant to the president for legislative affairs. He served as the presidents liaison to the Senate for banking, financial services, housing and securities-related issues. His term expires June 2002.

©1998 AICPA

In the More Than Golden Handcuffs article (JofA, Nov.97), Exhibit 2, Qualified Deferred Compensation Plan as a Percentage of Final Compensation, listed the percentage of bonus does qualify as 59%. The correct percentage should be 50%.

The Millennium Muddle (JofA, Dec.97) sidebar AICPA Has Help at Hand for the Y2K Issue listed the AICPAs Y2K Web site address as http://www.aicpa.org/members/y2000. The correct address is http://www.aicpa.org/members/y2000/index.htm .

©1998 AICPA

Tax Planning and the Tax Shelter Penalty Rules
Companies may have a harder time avoiding the accuracy-related penalties for substantial understatements of income tax that relate to relatively routine corporate tax planning initiativestougher standards may apply to understatements attributed to tax shelters.

The Taxpayer Relief Act of 1997 broadened the definition of tax shelter to include any entity, investment, plan or arrangement with a significant purpose of avoiding (or evading) federal income tax. Prior to the 1997 act, tax shelter rules were triggered only if there was a principal purpose of avoiding taxes.

The revised definition was intended to complement a new provision in the law that requires registration of some tax reduction schemes that are marketed on a confidential basis. It exposes companies to increased penalty risk and transaction costseven in the absence of confidential corporate tax shelters.

What has changed?
The penalty (20% of the underpayment related to the tax shelter) applies to an understatement of income tax that is substantial because it exceeds 10% of the tax that should have been shown on the return or $5,000 ($10,000 for a C corporation), whichever is greater. Companies can exclude amounts that relate to non-tax-shelter positions for which the taxpayer had substantial authority or that were adequately disclosed to the Internal Revenue Service (assuming a reasonable basis for the companys position existed).

However, a company cannot exclude a tax shelter item (for penalty purposes) unless it acted with reasonable cause and in good faith. The minimum requirements are substantial authority for the position and the taxpayers reasonable belief (independently formed or based on the advice of others) that the tax treatment was proper. The taxpayer may not be considered to have acted in good faith if there were negative factors, such as the lack of a significant business purpose, unreasonable benefits (relative to the investment) or the taxpayers agreement to protect the confidentiality of the shelters tax structure.

Observation: The new definition of a tax shelter is so broad that it may encompass routine or even incidental corporate tax planning. Structuring a transaction in a tax-efficient mannerlong an accepted practicecould trigger the tax shelter penalty rules if tax reduction was a significant purpose. Companies and their tax advisers should be aware that Congress has raised the bar on the documentation and professional advice that should underpin any entity, investment, plan or arrangement that is structured with an eye on tax planning.

Tracy Hollingsworth, Esq., staff director of tax councils at Manufacturers Alliance, Arlington, Virginia.

Individual

New Capital Netting Rules
The Internal Revenue Service announced (Internal Revenue Bulletin notice 97-59) it will apply new capital gains rules when a technical corrections act is passedretroactivelyfor tax years ending after May 6, 1997.

The Taxpayer Relief Act of 1997 amended Internal Revenue Code section 1(h) to provide for new capital gains rates for individual taxpayers. However, the act did not clarify how Congress wanted capital gains and losses netted or what holding periods would apply to different transactions. With the help of key members of Congress, the IRS has summarized the technical corrections and described how the new section 1(h) rules will be administered.

For example, if an individual taxpayer has a net capital gain, the long-term capital gains and losses would be separated into three tax rate groups: 28%, 25% and 20% (10% for gains that otherwise would be taxed at 15%). Gains and losses within each group would be netted to arrive at a net gain or net loss for each group. The following additional netting and ordering rules also would apply:

• Short-term capital losses (including short-term capital loss carryovers) would offset short-term capital gains. Any remaining net short-term capital loss would then be applied to reduce any net long-term capital gain from each of the tax rate groups, starting with the 28% group.
  
• For long-term gains and losses, a net loss from the 28% group (including long-term capital loss carryover) would offset any gains from the 25% group and, then, any from the 20% group. A net loss from the 20% group would offset any gains in the 28% group and, then, any in the 25% group. Any remaining capital gains would be taxed at that groups marginal rate.

The IRS amended schedule D and its instructions for 1997 to reflect these new rules, including an elaborate 36-line section (part IV) that assures readers that no gains are taxed at a rate higher than the groups marginal rate.

Observation: In a related announcement (97-109), the IRS warned tax preparers it will not update certain information returns and related instructions for 1997 even though the new rules would change the reporting requirements for these forms. CPAs should read the detailed instructions in this announcement for changes in the following forms: 1997 Form 1099-DIV, Dividends and Distributions ; 1997 Form 1099-B, Broker and Barter Exchange Transactions ; 1996 Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains , for 1996-97 fiscal years ending after May 6, 1997; and 1996 schedules K and K-1 for partnerships, S corporations and estates with 1996-97 fiscal years ending after May 6, 1997.

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

Line Items

• Homework for CPAs
  In Notice 97-60 (1997-46, IRB 1), the Internal Revenue Service explains the new, higher education tax incentives and answers a series of questions relating to other education-related tax relief, such as the Hope scholarship credit, the lifetime learning credit, interest deductions for student loans, the avoidance of the 10% tax on early individual retirement account withdrawals to pay for higher education expenses, the education IRA, employer-provided education assistance plans and qualified state tuition programs. 
  
• Measuring Gains
  The IRS issued guidance on capital gains dividends for tax years ending after May 6, 1997, for regulated investment companies, mutual funds, real estate investment trusts and their shareholders. Notice 97-64 includes examples of how dividends are designated as 20% gain distributions, unrecaptured Internal Revenue Code section 1250 gain distributions (taxed in the 25% group) or 28% gain distributions.
  
• Settling With the IRS
  A wife transferred stock, real estate and her principal residence to her former husband in accordance with a property settlement agreement. In exchange, he agreed to pay her $300,000 down and another $625,000 at 10% per year for 10 years. The husband sought to deduct his interest payments. The IRS denied the deduction as personal interest; however, the Tax Court upheld the deduction. According to the Tax Court, interest on indebtedness incurred incident to a divorce is not required under Internal Revenue Code section 1041 to be characterized as nondeductible personal interest. Therefore, interest paid can be deducted if it is investment interest, passive activity interest or qualified residence interest ( Seymour v. Commissioner , 109 TC no. 14, 1997).
  
• Denied Credit
  An office products wholesaler was denied a research tax credit under IRC section 41 for the costs incurred in developing seven computer software programs for internal use. According to the district court, the company failed to venture into an uncertain field or provide the technology to utilize computers in a manner that was never before available. This was the first case to examine credit eligibility for internal-use software ( United Stationers Inc. v. United States , no. 92 C 6065, 1997).
  
• Drive-In Resolutions
  The IRS is testing a new administrative process for resolving tax disputes in bankruptcy cases. The tests are being conducted in Arizona, Indiana, Massachusetts and Houston, Texas. The process allows debtors or their estates to resolve their tax disputes with the IRS as soon as bankruptcy proceedings begin. Most disputes now take at least 15 to 30 days to be resolved (announcement 97-111, IR-97-43).

• Middleman Obligations
  Relying on revenue ruling 93-70 (1993-2 CB 294), the IRS ruled that an attorney who made payments from a client trust account to expert witnesses and private investigators was a middleman payer under IRC section 6041. Since he exercised oversight and management functions in connection with the payments, the attorney was required to file informational returns and payee statements (TAM 9744002).

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

©1998 AICPA

According to the chief executive officers of 440 fast-growing U.S. companies with revenues ranging from $1 million to $50 million, acquisitions are becoming a key to growth. Acquiring companies have achieved revenues 2.4 times higher than similar nonacquiring companies.

Source: Coopers & Lybrand Trendsetter Barometer survey.

©1998 AICPA

The document emphasizes the broad approach to competencies, Sandra E. Sloyer, a member of the BIEC professional development subcommittee, told the Journal . It highlights many different competencies expected from CPAs. In fact, it says, As finance professionals we have placed far too much emphasis on the technical proficiencies of the CPA rather than on the well-rounded individual with people skills. Most of the document is organized as a table, with descriptions of skills for CPAs at different levels. For example, in the competency area of best practices, the skill a manager would be expected to have would be to develop and implement appropriate finance best practices throughout the organization.

Flexibility is key
This is not going to be the final model, because as society changes, business changes and thus competencies change as well. Well have to keep the document fresh continually, said Sloyer. It already has gone through several versions. With this particular version, said Sloyer, the BIEC wants to make sure its simple to usea document the members are comfortable with. This summer, the AICPA plans to announce an implementation rollout of the document, with an assessment tool and competency training.

Copies of the invitation to comment (without the skills identified) can be downloaded from AICPA Online (http://www.aicpa.org), or a complete copy can be ordered by calling Emanuela LiMandri at 212-596-6157. The comment period originally ended January 31 but has been extended to February 28.

©1998 AICPA

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Short takes, notes and items of interest

©1998 AICPA