Podcast part 1: Melancon on news and trends affecting CPAs

Barry Melancon, CPA, CGMA, the CEO of AICPA & CIMA, joins the show this week for the first part of a two-part conversation on the state of the profession and what CPA can expect in 2024 on several fronts.

Melancon details concerns about a potential IRS shutdown in tax season, the state of ESG reporting and regulation, how elections could play out, and why the threats to CPA licensure are real.

Part 2 of the conversation will be published in an early January episode of the JofA podcast.

What you’ll learn from this episode:

• Melancon’s one word that sums up the state of the profession looking ahead to the new year.
• An overview of two major issues affecting CPAs: the moratorium on employee retention credit claims and requirements for beneficial ownership information reporting.
• The “significant service implications” of a potential government shutdown related to the IRS.
• Why legislation in Europe and California will have an effect on ESG reporting, even for businesses outside those areas and regardless of any SEC action on ESG.
• Melancon’s assessment of “the art of compromise” in Washington.
• The reasons CPA licensure is so important.

Play the episode below or read the edited transcript:

To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Neil Amato: Barry Melancon is the CEO of AICPA & CIMA. He’s joining me, the Journal of Accountancy‘s Neil Amato, for a special two-part conversation on the JofA podcast. Barry and I will talk about the news and trends affecting the profession, how transformation is altering business in general and accounting in particular, and Barry’s look at what 2024 may hold.

Barry, as a return guest, thank you very much for coming back on the show.

Barry Melancon: Neil, great to be with you. Great to be sending some of these messages as we get towards the end of the year to all of our members and all of the parts of our profession that is so critical to the future.

Amato: We’ll start with this. What one word or phrase would you use to describe the state of the accounting profession going into 2024?

Melancon: Opportunistic. I think the world needs us, and I think the confusion and disruption in the world revolves around a lot of difficult things. We call ourselves the trusted adviser. It’s really tough to be the trusted adviser right now because there’s so much uncertainty. I made some comments about that at our Council meeting in October. The reality is that our profession and the people in it are best positioned to be the very best advisers they possibly can to their clients and their employers, etc.

The reality is that we also have to have the capability of doing that in a bit of uncertainty that exists today and being comfortable in our own skin on that. As a personality trait, we like to always be right, but the world is a very difficult place to always be right, right now. That gray area is a very important trait for us to deliver. But if we can do that then that opportunity right now and the need is incredible.

Amato: You mentioned that talk at fall Council. In the room, you said probably no one here has lived in a time that is as complex, as – that word you used – “opportunistic,” and as fast-paced as it is today. Looking forward to the new year, what comes to mind around the specifics of that statement, and what do you see as the role the profession will play?

Melancon: Well, I do think that the generations that are in the workforce today, we’re living in a world that we’ve not experienced. I come back to our training, and our ethics, and our trust allows us to get through that. But we have to be willing to get through that. We have to add and take the different factors that are out there and connect those dots as best we can. If we do, then we’re making a difference in the world and regardless of the corner of the globe we’re in, we are all facing these challenges today.

I’ll come back to that trusted adviser notion of the uncertainties in Washington, the uncertainties in Europe, the conflicts that exist, the economic uncertainties. We’ll talk about in a moment the elections coming around for us, the political strife around the world. All of those things create an environment that we have to work through. We will work through it. We’re a profession that has proven over and over to work through the uncertainties of other times. But it’s just a more of a challenge today because basically everybody active in our profession has very little experience in a world or country even, that is in the situation that we’re in now. But I’m very confident.

Amato: The suspension of employee retention credit claims, and then also requirements on reporting beneficial ownership information, created unrest in the profession this year. How do you foresee those issues progressing or being resolved in 2024?

Melancon: Let’s take the ERC first. We were very vocal in saying that the IRS needed to change some things in that. It was very unfair to the people trying to do a legitimate job with their clients. The vast majority of those were CPAs. There were others, too, that were trying to do a legitimate job. There were a lot of players in the market that were pushing the envelope and really not following the law or pushing an envelope way beyond what the intent of that credit was, as it related to coming out of COVID.

The IRS took some very significant steps, and I think that issue is basically behind us as we get into 2024 now. They took some steps to say: “We’re going to be very hard on these pending claims. We are going to not process new ones coming in.” There will still be some to get processed as a carryover from 2023 to 2024, and some of those are legitimate and some of those will be denied. But I think the apex of that issue is behind us. I think it needed to be behind us and that’s a good thing.

The second thing is the beneficial ownership issue, which the apex is something in the future for us on that one. We have been very vocal that the vast majority, and this is a small business issue, this is a compliance with basically anti-money laundering legislation around the world, that’s also been passed in the United States. It has a huge compliance element that deals with smaller businesses in a reporting mechanism about who is the beneficial owner.

I won’t go into all the nuances of the technical point. We’ve covered that in Town Halls and the like. But basically, about 35 million small businesses in the U.S. will have by the end of 2024 a filing requirement. As new businesses occur, as ownership changes, there’s an ongoing reporting requirement. I think it’s an opportunity for the profession. There are some people don’t want to do this work, but I think the reality is that these small businesses overwhelmingly are going to have a relationship with a CPA.

A lot of them are going to be pass-through entities. The organization that oversees this, which is called FinCEN, which is a department in the Department of Treasury, has loosened some of the rules a little bit for 2024, not in entirety. We’re going to continue to push that there needs to be a longer grace period, there needs to be more education, and there needs to be legislative changes in 2024 to make this better. If there is no legislative change, there’s going to be a compliance requirement for these 30-million-plus businesses. I think the CPAs, and we’ve given, through our insurance carrier, ways to do this and through engagement letters and a protection perspective, we’re going to be really critical in helping small businesses to comply.

Non-compliance has some pretty steep penalties that are associated with it. I think there’s going to continue to be changes in 2024. There’s certainly going to be debates about changes. If that’s the case, then hopefully we will see a greater rationalization of it in 2024 as we move into 2025 with it. But the issue is not going to go away in its entirety because it’s part of an anti-money laundering initiative globally that our country is part of.

Amato: That’s BOI and ERC in a few words. Let’s talk now about the IRS. What would be the impact of a government shutdown in February as it relates to IRS service in tax season?

Melancon: We’re very concerned about the potential of a government shutdown and its impact on the IRS and that happening during tax filing season. We’ve been very vocal on that. We said that there are some things that need to be put in place, some emergency procedures at the IRS. Or we could have a very ugly situation as it relates to American taxpayers filing, whether they do it on their own or through paid preparers like the CPA profession. Certainly the service level issues of the IRS are potential to be impacted if the government shuts down. The Service has said they’ll have skeletal operations, but we know responding to phone calls and the like has been a problem with the IRS. They’ve made some improvements recently.

But the reality is a government shutdown will create huge problems just from a service perspective and the answering of questions. That will have impact on the ability of our country to collect its tax revenues. But the biggest impact will be the ability of our CPA members to adequately or effectively service their tax clients, probably going to lead to an increase in extensions. There certainly will be a degree of uncertainty and all that process. We’re going to continue to advocate for exceptions for the IRS, better answers from the IRS if there is a shutdown. It is very difficult to predict whether or not the government will avoid the shutdown altogether.

We have a new Speaker of the House. We have commitments on the Republican Party in the House to take on appropriations bills individually. Those things then go to the Senate. What comes back from the Senate, who knows if that creates stalemates or not? It’s an election year. The likelihood of fighting over fundamental issues and appropriations is real.

Frankly, a lot of our members would say the necessity to look at the overall deficit situation at the federal government is also real. Also a lot of our members would say, but the adequate funding of the IRS is very real.

All of those factors are a very unpredictable outcome. I think the biggest unpredictable outcome is whether or not the two parties can agree on a funding mechanism that is clearly going to fall at least for its next test in the middle of tax season. If they don’t, I think there’s going to be really significant service implications coming out of the IRS.

Amato: We’ll get back to elections a little bit more in a bit, but first going to go to the ESG reporting topic and regulation around that. As of this recording Friday, Dec. 1, there’s no SEC final rule yet, but that doesn’t mean that there’s not a lot happening, right?

Melancon: Let me put ESG in this context because a lot of the people listening to this podcast will be in smaller firms, or smaller businesses. I think let’s first just set government regulation in the form of the SEC aside for a second. I’ll come back to it, but let’s just set it aside. There are market forces and there are state forces that are driving changes in ESG. California has passed two bills. They will have extraterritorial effect, meaning it will affect companies outside of California.

Europe is moving forward with requirements that will have extraterritorial effect, meaning it will have impact on American businesses even though they’re not in Europe. Now there’s political pushback occurring in Europe, so there’s going to be some modification in what’s being required. But even if we have no SEC rule between California and Europe, we’re going to have implications into the United States. On top of that, we have market forces, we have investor forces, we have supplier forces that are playing out in this process.

Then to a smaller business perspective, the larger companies will clearly have reporting requirements very quickly. The way they will meet those reporting requirements is to pull through their supply chains, either their supply chains on one side or their customer distribution channels on the other. They will have to pull through data in order to comply with their reporting requirements on the impact on the environment. The environment is the issue that’s driving the ESG train, environment being the E, social and governance being the other two letters.

We’re going to see other things evolve over the next year or two in the social area, particularly in the employee side of things. I think we will see that. We have a fact pattern that is going to impact business and then business is going to impact their supply chains, regardless of what the SEC does. Now, what might the SEC do? Interestingly, Chairman [Gary] Gensler did a session at the capital markets competitiveness board meeting of the U.S. Chamber of Commerce, which I serve on, which is a group that’s not necessarily supportive of the SEC rules.

He came in and said you sort of want me to do things as the SEC because of this extraterritorial effect. That’s going to get overly complicated and we can help simplify it. Well, that remains to be seen if that’s really how that plays out. But I think we can assume that there will be an SEC rule. I think there’s been some debate about maybe there won’t be an SEC rule because there was so much political pushback, and 2024 is an election year and maybe they won’t do anything.

I think they’re going to do something. Whether they do that in December or whether they do that in 2024, that remains to be seen. But I think they’re gonna do something. It probably will be scaled back from what the original proposal will be. I don’t know that for a fact, but that’s my best guess. Because the pushback has been such, I think the SEC is going to try to do something that is practical and workable. That will be in the eye of the beholder.

A lot of people won’t say it’s practical and workable, but I think that means that they will probably try to make some changes to the original proposal. But I think the big takeaway is the SEC is a part of this process. The down channel to smaller private businesses is about the channels of distribution. Look, we have companies in the United States alone that have 10,000 and 15,000 suppliers. If they are material suppliers, there’s going to be information flow that’s going to be asked of those businesses.

Many of those businesses are small- and medium-size businesses. Many of those businesses are served by small- and medium-size CPA firms. We’re going to start to see that effect into 2024-2025 as these reporting requirements kick in.

Amato: No matter what happens on the SEC front, whether it happens this month, or in the future, there’s still movement thanks to just things going on around the world. That’s a good summary.

Melancon: It’s political. Let’s be honest, it’s political. There are very strong political movements. California passed a pro-environment piece of legislation. We will likely see some legislation in other states that try to block some of those things. We’re certainly seeing activities and those spaces now as it relates to state pension funds and other things as to how investment decisions are driven.

There’s political forces on both sides. But I do think overall, if you take a pulse of the globe, there is movement in the direction of greater transparency and greater reporting, greater measurement, and ultimately for our profession, assurance over the reliability of that information. Over the next three or so years, assurance, either limited assurance or reasonable assurance, will kick in in various parts of the world and ultimately in the United States as well.

Amato: Speaking of politics: 2024 elections. How could CPAs be affected by them and what preparations can they take now? I know it’s not an easy question to answer.

Melancon: Well, we live in the most divided government in our lifetimes. We talked about the complexity, the world being more complex than any time in our lifetimes [for] the people who are in the workforce today. Clearly, the government is more divided today. The art of compromise in Washington D.C., is very hard to find. That polarization of the extremes on both sides – very few people sitting in the middle – makes for a very difficult political process.

We have a very close House of Representatives, a very small margin for Republicans. The likelihood of the outcome is that it will remain either a very small Republican majority or it will switch to a very small Democratic majority, that does not bode well for compromise, that bodes to difficulties.

On the Senate side, if you had to make a prediction today based on the seats that are up for re-election and the states that they’re in, there’s probably a reasonably good chance that the Republicans would retake control of the Senate. It’s not certain, but it is a reasonably good chance. We could easily have divided government that’s a reverse of what it is today. We could have a Democratic House and Republican Senate. Today we have the opposite.

The White House – obviously, you will read many different stories about what might happen with the White House, who actually the candidates might be. At this point, you would say the two leading candidates are both people who are either at or close to 80 years old. The rest of the world is sort of scratching their heads, how that could possibly be the outcome in the United States.

What’s the impact of all of that? Is it going to be still confused, not clear answers? A divided government? What can the profession do to prepare? I think there’s a lot of things we would like to see. For instance, tax extensions and extenders. How you make an individual tax extension and then tax extenders, which are provisions of the law that affect clients. We’d like to see some of those things get passed with some legislation.

A new Congress will probably give us an opportunity to do some of those things. That would likely be a tax bill, there could still be one in 2024. I think the preparation of that is if I would be dealing with a client or an employer, is that this degree of uncertainty is probably going to be high. Business likes certainty. I don’t think that is something that is near on the horizon. I think helping clients and employers deal with that uncertainty, the best decision-making possible, back to how we started this on the trusted adviser role, is really what’s going to come out of Washington.

We are a divided country, we’re a divided citizenry. Until we find someone who is a leader that can sort of cross those two divides on the major issues, of which taxation, regulation, business issues are dead square in the center of some of those topics – until we get that – I think we’re going to still see this flip-flop potential and the uncertainty coming out of Washington.

Amato: Changing topics: CPA licensure. What would you say is the current state of CPA licensure in this country?

Melancon: It’s a great question, Neil, on CPA licensure, because most people listening to this would probably not put that on an issue list of what I should be thinking about. The reality is that back to the divided government and the polarization of states, there are movements out there in almost every state to affect what is licensed and how they’re licensed in the state.

The CPA is licensed under state basis. And people will say, our members will say, they don’t mean us, they mean all these other things that are licensed. They don’t mean doctors and engineers and architects and CPAs. They mean all this other stuff. But they do actually mean attacking even licensure of professionals. We lead a coalition called ARPL [Alliance for Responsible Professional Licensing], along with our friends at the National Association of State Boards of Accountancy (NASBA) and some of the other professions, that is trying to help state legislatures understand the public interest of a state licensing regime, an effective state licensing regime.

We have been effective with our partners in the state societies and the state boards and NASBA and these other professions to not see legislation pass in states that would undo the licensing regimes. We have to defend in all 50 states; we cannot afford to lose in one. The reality is that there are hundreds on an annual basis of pieces of legislation that attack, in various states, these licensing regimes.

It is something that as members who are active with their states, or the institute, or maybe serve on a state board – it is a very important issue to have at the top of your list because losing licensure would be devastating to the profession, to its mobility, to its ability to serve in the public interest, etc. Believe me, it is a major political issue that’s out there.

The answer to the question is, we have defended as a profession as has other professions, the licensing process well, it will be hard work to continue to do so. There is risk there that probably no one listening to this podcast would’ve identified two, three or four years ago. Even as they listen to me today, they might say, “Come on, they don’t really mean that.” But there are forces in play that do in fact mean that.

Amato: Thank you for that, Barry. This is the end of part one. For the listeners, part two will air in early January. We’ll talk about GenAI because how could you have a podcast these days without talking GenAI. We will also talk some other transformation topics, including the push by private equity investors into accounting. Again, that’s coming up in early January. Thanks for listening to the JofA podcast.