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Fred Timmons, TSCPA Chairman John Sharbaugh, TSCPA CEO Bob Owen, TSCPA Managing Director, Regulation & Legislation.

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Presentation on theme: "Fred Timmons, TSCPA Chairman John Sharbaugh, TSCPA CEO Bob Owen, TSCPA Managing Director, Regulation & Legislation."— Presentation transcript:

1 Fred Timmons, TSCPA Chairman John Sharbaugh, TSCPA CEO Bob Owen, TSCPA Managing Director, Regulation & Legislation

2 TSCPA Results

3 What a Difference 2 Years Makes Money to spend More new legislators More conservative legislators More bipartisanship Republicans in charge, but more benevolent Democrats still opposed, but less disruptive House vs. Senate distrust

4 TSCPA Legislative Agenda Changes to the Accountancy Act SDSI Sunset Renewal Margin Tax Recommendations Oppose Sales Taxes on Professional Services

5 Accountancy Act Changes Senate Bill 228 (House Bill 608) Authored by CPAs Sen. Williams and Rep. Otto Strengthen accountant-client privilege by requiring a judge to sign a subpoena Make an exception to client confidentiality for PCAOB, Texas Securities Act and practice merger or acquisition negotiations Strengthen investigation confidentiality, including changes to the Texas Open Meetings Act Repeal exam provisions no longer relevant to the current computerized examination process Repeal the prohibition against waiver of fees and penalties

6 Progress to Passage Cleared Senate committee Feb. 5 th Passed Senate Mar. 13 th Cleared House committee Mar. 19 th Passed House Apr. 25 th Sent to the governor May 1 st Signed by the governor May 10 th

7 SDSI Sunset Renewal House Bill 1685/Senate Bill 208 Authored by Rep. Price and Sen. Whitmire Fifth-year scholarship issue SDSI Reforms – modeled after TSBPA House committee hearing March 26 th Passed House committee April 2 nd Passed House April 23 rd Passed Senate committee April 30 th Passed Senate May 9 th Signed by the governor May 24 th Effective date September 1 st

8 TSBPA SUNSET POSTPONED UNTIL 2019! Sunset Model Development

9 “Just because you do not take an interest in politics doesn’t mean politics won’t take an interest in you.” From Pericles (430 BC)

10 Bill Monitoring 1,047 bills reviewed 514 bills monitored Bill monitoring process Legislative Advisory Executive Committee Bill intervention – Key Persons

11 Monitored Bill Action HB 1756 by CPA Stephenson – Eliminates peer review for Compilations and restricts what TSCPA can charge non-members Committee hearing Died in committee HB 1757 by CPA Stephenson – Mandates two solo practitioners on TSBPA and requires all CPA positions on the board to be CPAs in public practice No committee hearing – died in committee

12 Monitored Bill Action (Cont’d) HB 3488 by Burkett – GAAP exception for governments – died in committee w/o hearing SB 176 by Carona to require public disclosure of all reports by state agency contractors – fixed and passed HB 798 by Thompson to prohibit licensing agencies from denying a license due to a Class C Misdemeanors – passed

13 Monitored Bill Action (Cont’d) HB 87 by Callegari that would give non-certified and non-licensed accountants the opportunity to practice accounting We opposed and testified against at the hearing We worked with Callegari on extensive revisions Revisions were not completely satisfactory Bill voted from Committee We agreed to disagree Bill died in Calendars

14 Other Stuff Infrastructure: water runs; roads blocked Public education – funding and fundamentals Gun bills were debated all day on Saturday Prohibiting Medicaid expansion Texting while driving ban – died in the Senate Transparency for political groups – Perry veto Gambling loses again Craft beer distribution liberalized Payday lending regulation defeated

15 The Important Stuff Pecan pie is the official State Pie of Texas Feb. 16 is Texas Homemade Pie Day Peach Cobbler is the official State Cobbler of Texas Shamrock St. Patrick’s Day celebration is the official St. Patrick’s Day Celebration of Texas Nacogdoches is the official Garden Capital of Texas The City of Canton is the Walking Capital of Texas The Small Town Christmas celebration in Bellville is the official Small Town Christmas Event in Texas The first week in May is Texas Bison Week Gregg County is the Balloon Race Capital of Texas The Kemp’s ridley sea turtle is the official State Sea Turtle

16 AICPA Council Meeting May 19-21, 2013 Washington, D.C.

17 Texas Council Delegation Currently 15 TSCPA members serve on AICPA Council One of the largest Council delegations in the country Council normally meets in full session twice a year in the Spring & Fall Every other year the Spring Meeting is held in Washington, DC and Council members conduct visits with their Members of Congress Our group met with 24 Congressional offices during our two days

18 This Year’s Issues for Hill Visits Tax Reform Federal Financial Responsibility Mobile Workforce State Income Tax Simplification Tax Return Due Date Simplification Amending Municipal Advisors Registration Requirements Texas specific item – TSCPA Federal Tax Policy Committee’s Analysis of proposals to repeal tax treatments of domestic oil and gas exploration & development

19 Guiding Principles of Good Tax Policy

20 Tax Reform AICPA and TSCPA do not take a position on what is the “best solution” for reforming the federal tax system We aim to provide unbiased facts and analysis to foster informed discussion We have consistently supported tax reform simplification efforts because we are convinced it will significantly reduce taxpayer’s compliance costs, encourage voluntary compliance through an understanding of the rules, and facilitate enforcement actions

21 Guiding Principles of Good Tax Policy Equity and fairness. Similarly situated taxpayers should be taxed similarly Note: Equity is best measured by considering a range of taxes paid, not by looking just at a single tax Certainty. Tax rules should clearly specify when and how a tax is to be paid and how the amount will be determined. Certainty may be viewed as the level of confidence a person has that a tax is being calculated correctly Convenience of Payment. A tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer Economy of calculation. The costs to collect a tax should be kept to a minimum for both the government and the taxpayer Simplicity. Taxpayers should be able to understand the rules and comply with them correctly and in a cost-efficient manner

22 Guiding Principles of Good Tax Policy Neutrality. The tax law’s effect on a taxpayer’s decision whether or how to carry out a particular transaction should be kept to a minimum Economic growth and efficiency. A tax system should not impede productivity but should be aligned with the taxing jurisdiction’s economic goals Transparency and visibility. Taxpayers should know that a tax exists, and how and when it is imposed on them and others Minimum tax gap. A tax should be structured to minimize noncompliance Appropriate government revenues. A tax system should enable the government to determine how much tax revenue it likely will collect and when—that is, the system should have some level of predictability and reliability

23 The U.S. Government’s Financial Statements and the Country's Fiscal Health

24 The role of CPAs Serve as trusted advisors to a variety of organizations Help businesses and individuals achieve strong financial standing Protect the public interest Explain complex financial issues

25 Federal budget

26 Federal financial statements

27 2012 financial statements


29 U.S. financial statements differ from other organizations Most financial statements show obligations or liabilities on balance sheet U.S. government’s financial statements do not include Social Security and Medicare Footnote disclosures Not reflected as liabilities

30 Reality of Future Obligations These Future obligations equal: Additional social insurance deficit - $52 trillion Cumulative deficit - $16 trillion Total Deficit - $68 trillion

31 Key data in publicly traded company’s financial statements

32 In trillions 2009201020112012 $11.5 $13.5 $14.8 $16.1 Accumulated federal deficit

33 Resources for the Public



36 Court Rules Tax Preparer Registration Invalid IRS began an initiative in 2009 to require tax return preparers to register, prove their competency and take CPE to maintain their registration Also required all tax return preparers to obtain a PTIN (Preparer Tax Identification Number) and provide it on returns they prepare AICPA, TSCPA and other state societies lobbied to have CPAs exempted from the testing and CPE provisions of the new registration scheme

37 Court Overrules IRS In January, a federal judge in the U.S. District Court for the District of Columbia granted a permanent injunction to stop the IRS tax return regulatory program Suit was filed by three independent tax preparers from Chicago, N.J. and Wisconsin and the Institute for Justice, a conservative civil-liberties advocacy group They accused the IRS of enforcing the requirements without Congressional approval The Court agreed with the plaintiffs and said the program affected their livelihood

38 IRS Appeal Fails IRS appealed the decision to the United States Court of Appeals But in March the District of Columbia Circuit Court of Appeals three-judge panel upheld the earlier decision So the mandatory testing and CPE components of the program are suspended, although preparers could pursue those on a voluntary basis The registration piece is still in place so all paid tax return preparers (including CPAs) still need to have a PTIN IRS is appealing again, but there has been no court date set and this process will take time

39 Legislation Proposed H.R. 1570: Taxpayer Protection and Preparer Fraud Prevention Act of 2013 introduced on 4/15/13 in U.S. House by Rep. Cedric Richmond (D – LA) Basically would give the Secretary of the Treasury the authority to license and regulate tax return preparers No co-sponsors and not much chance of passing


41 Mobile Workforce Legislation Provides a 30-day threshold before a state may impose a tax on, or require withholding from, the wages of nonresidents working in the state TSCPA, AICPA and other state CPA societies are supporting this legislation Legislation in the last Congress had support and was passed in the House but did not get passed in the Senate Then Senator Kay Bailey Hutchison was the lead Republican sponsor in the Senate last year

42 Legislation Back This Year HR 1129 – same legislation as last year has been introduced by Reps. Howard Coble (R-NC) and Hank Johnson (D-GA) Rep. Blake Farenthold (R-TX) and Rep. Steve Stockman (R-TX) are co-sponsors We expect Senator Sherrod Brown (D-OH) to reintroduce legislation in the Senate sometime soon TSCPA sent letters a few weeks ago to Texas House members We are hopeful that this legislation will pass this year


44 Tax Return Due Date Legislation The delivery of K-1 Schedules close to tax return filing deadlines makes it nearly impossible for taxpayers and their tax advisers to prepare and file timely, accurate returns Schedule K-1 information is a component of millions of tax returns of individuals, S and C corporations, trusts, estates, partnerships and other entities Taxpayers and their CPAs need the information included in the Schedules K-1, which are issued by partnerships, S corporations, some trusts and estates, so that the owners and beneficiaries can file personal and business tax returns However, the information returns often arrive just days before either the original or extended return due date

45 House & Senate Bills Legislation in the Housed and Senate last Congress but was not successful Reintroduced again this year H.R. 901 sponsored by Rep. Lynn Jenkins (R-KS) and S. 420 by Sen. Mike Enzi (R-WY) TSCPA and AICPA are working to see this legislation passed TSCPA sent letters requesting from Texas members of Congress Rep. Mike Conaway (R-TX) and Pete Sessions (R-TX) are co-sponsors

46 Return TypeForm S 420 Initial Due Date S420 Extended Due Date HR 901 Initial Due Date HR 901 Extended Due Date Partnership 1065 March 15 September 15 March 15 September 15 S Corporation 1120S March 31 September 30 March 31 September 30 Trust and Estate 1041 April 15 September 30 April 15 September 30 C Corporation 1120 Series April 15 October 15 April 15Last business day of September for 10 years, 10/15 thereafter Individual 1040 April 15 October 15 April 15 October 15 Employee Benefit Plan 5500 July 31 November 15 July 31 November 15 Foreign Bank Account Reporting Form TD F 90.22-1 April 15 October 15 April 15 October 15


48 Marketplace Fairness Act Senate Bill S. 743 passed recently Will have a tougher time in the U.S. House (H.R. 684) Grants the states the authority to compel online and catalog retailers, no matter where they are located, to collect sales tax at the time of a transaction States must simplify their sales tax laws There is an exemption for small businesses with less than $1 million a year in online sales.

49 States Must Simplify Two options for simplifying their sales tax laws: Join the 24 states that have already voluntarily adopted the Streamlined Sales and Use Tax Agreement (SSUTA) (note: Texas is not currently part of SSUTA); or meet five simplification mandates listed in the bill. They are: Notify retailers in advance of any rate change within the state; Designate a single state organization to handle sales tax registrations, filings and audits; Establish a uniform sales tax base for use throughout the state; Use destination sourcing to determine sales tax rates for out-of-state purchases; Provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data.

50 Bi-partisan Support The legislation has bipartisan support, including sponsorship from: 96 members of Congress (30 senators and 66 representatives) 27 governors (15 Republican, 11 Democrat and one Independent) Large number of national and state trade associations including the Texas Retail Association Businesses of all sizes, including Amazon and Wal- Mart

51 Texas Support Governor Perry is not on the list of governors supporting and neither are either of our two U.S. senators from Texas But there are four Texas congressmen on the list – Joe Barton (R), Mike Conaway, CPA (R), Eddie Johnson (D) and Marc Veacy (D) Supporters say it is a matter of fairness and assuring a “level playing field” between brick and mortar retailers and online retailers. And it is also a concern to most states that support themselves off sales taxes

52 Internet Commerce is Growing Internet commerce is growing Last year, Internet sales were $226 billion, up nearly 16 percent from the previous year according to the Commerce Department The National Conference of State Legislatures estimates that states lost $23 billion last year because they couldn’t collect taxes on out-of-state sales


54 Municipal Advisors Registration Requirements Stemming from concerns about municipalities’ debt offerings, the Dodd-Frank Act addressed a change in the registration requirements for municipal advisors The law defined municipal advisors to include, among other things, financial advisors In the proposed rules to implement Dodd-Frank, the SEC did not carve out CPAs from the definition of municipal advisors Many of the normal services that CPAs provide – like audit services or issuance of letters for underwriters - would not constitute the provision of financial advice

55 Municipal Advisors Registration The profession sought relief from the requirement from Congress In the last Congress legislation passed in the House New legislation has been introduced this year - H.B. 797 Still awaiting a bill in the Senate but anticipate one will be introduced Legislation will provide an exemption from registration for CPAs performing “customary and usual” accounting services for municipal clients

56 Analysis by the TSCPA Federal Tax Policy Committee

57 TSCPA Analysis – Key Points Importance of Oil & Gas Drilling to the economy – Texas and the U.S. Financing Oil & Gas Drilling Tax Treatment of Oil & Gas Drilling Intangible drilling costs Percentage depletion The domestic production activities deduction Deduction for tertiary injectants Amortization of geological and geophysical expenditures Use of LIFO inventory method for oil & gas Passive loss exception for working interest in oil & gas properties

58 Small Independent Producers Many people often associate the oil & gas industry with huge multinational corporations 95% of the nation’s oil & gas wells area actually drilled by small businesses, referred to as “independent producers” They employ on average no more than 12 people They rely upon the existing tax treatments which help keep domestic jobs from being exported overseas This TSCPA Analysis provides an objective look at the tax treatments and how they compare to other industries and manufacturers

59 The Webcast will return after a short break – please rejoin us then

60 Budgets and Taxes

61 Budget Package SB 1 – $197 billion biennial budget HB 1025 – Supplemental Appropriations $1 billion from General Revenue Fund $3.9 billion from Economic Stabilization Fund SJR 1 – Water Revolving Fund HB 4 – Water implementing legislation HB 7 – Elimination of the System Benefit Fund HB 500 – Franchise Tax Cuts HB 800 – R & D credits Total tax cuts = $1.4 billion; Is it enough?

62 $715 Million Revenue Reduction

63 Over 80 Franchise Tax Bills Filed Repeal the tax Reduce the rate $1 million revenue exemption/deduction To benefit a specific industry or sector Changes to the Cost of goods sold deduction R & D and other credits jury pay taxpayer recruitment graduates of certain institutions energy generating equipment energy efficient single family homes jobs creation

64 TSCPA Margin Tax Recommendations HB 900 by Taylor and HB 1672 by CPA Perry: Federal COGS – No Hearing HB 1463 by Hughes Independent contractor deductions – Cost $290 million HB 1836 by Zedler Exemption for all flow-through funds – Cost $435 million HB 2347 by Zedler All TSCPA recommendations – Cost $1 billion+-No Hearing HB 2385 by Capriglione Repeals Finnegan reporting requirement – No cost! Passed House May 10 th Failed in the Senate, but included in HB 500

65 Franchise Tax Bills Passed HB 800 - R&D credits and exemptions Also provides sales tax exemptions Cost $239 million HB 2766 – Flow through revenue exemption for subcontractors and remediation No fiscal implications HB 2451 – COGS deductions for crop dusters Cost $288,000 HB 500 – Omnibus bill Cost $715 million

66 HB 500 Provisions Temporary Rate Reductions Returns due in 2014: 0.975% and 0.4875% Returns due in 2015: 0.095% and 0.475% IF COMPTROLLER CERTIFIES REVENUE IS AVAILABLE $1 million revenue exemption Made permanent Added as an alternative deduction Inflation adjusted every two years Compensation deduction inflation adjusted

67 HB 500 Provisions (cont’d) New Retail and Wholesale Industries SIC 753 – Automotive repair shops SIC 7353 – Heavy construction equipment rental or leasing SIC 7359 – Equipment rental and leasing – NEC Rental-purchase agreement activities - Chapter 92, Business and Commerce Code Separation of retail/wholesale utilities from other retail/wholesale entities

68 HB 500 Provisions (cont’d) New flow-through revenue exemptions Pharmacy network rebates Transportation or delivery costs incurred by: Aggregate transporters Barite transporters Waterway transporters for waterway transportation costs Landman services for Landman companies Cost of vaccines Taxes and fees incurred by registered motor carriers Relocation costs for entities moving to Texas

69 HB 500 Provisions (cont’d) New cost of goods sold deductions Petroleum pipelines - cost of transporting non-owned products Movie theaters - all cost of showing movies

70 HB 500 Provisions (cont’d) Apportionment reporting eliminated Joyce method of apportionment used for the tax Finnegan method reporting only eliminated Repeals Sections 171.103(c) and (d), Tax Code, relating to the requirement that a taxable entity that is a combined group include in the group's initial and annual franchise tax reports information regarding the gross receipts of group members who do not have a nexus with Texas.

71 HB 500 Provisions (cont’d) Internet hosting: Texas receipts are only those receipts from customers located in Texas Exempts insurance companies that pay a gross receipts tax from the franchise tax Exempts certain political subdivision corporations from the franchise tax Provides a transferable franchise tax credit for rehabilitation of certified historic structures

72 You can take your hand off your wallet! They actually reduced taxes!


74 AICPA Financial Reporting Framework for SMEs Designed for Small & Medium-Sized Entities (SMEs) Intended for entities that are not required to prepare GAAP financial statements Emphasizes historical cost over fair value Calls for reporting of costs when they are incurred and revenue when performance is achieved with reasonable assurance that collection will occur Exposure period ended in late January Final Framework will be issued soon

75 Key Features of the Framework The FRF for SMEs includes a combination of accrual and income tax accounting methods. It is a less complicated and less costly framework when U.S. GAAP based financial statements are not required. It is not proposed as an authoritative framework and its use is not required. Management of SMEs would have the option of choosing the FRF for SMEs as its applicable reporting framework.

76 Benefits to Financial Statement Users The primary measurement basis is historical cost. Relevant information is included in footnote disclosure which are fewer than under U.S. GAAP. Accounting methods are traditional and understandable by most users of financial statements. Fewer reconciling items are necessary to reconcile book income with tax income. The framework is based on principles applicable to most industries for incorporated and unincorporated entities. It addresses only the typical financial statement matters encountered by SMEs.

77 Other Benefits Traditional accounting methods and accrual income tax methods are blended into the proposed framework. Preparers who follow the proposed framework will find that it reduces the number of Schedule M differences that a business would have to report on its tax returns to reconcile its financial statements to its taxable income As proposed, the framework is designed to facilitate the creation of financial statements that provide users, especially banks, the information they need without unnecessary disclosures that increase the time and expense of preparation

78 Not for those going Public SMEs run by owner-managers are expected to find the proposed framework especially useful, as the financial statements prepared under the framework will confirm their assessments of performance, describe what they owe and own, and help users understand cash flows The proposed framework is intended for SMEs whose financial statement users have direct access to management, and is intended for companies that have no intention of going public

79 Private Company Standards FAF created the Private Company Council last Fall to identify and vote on potential modifications and exceptions to U.S. GAAP for private companies Billy Atkinson of Texas is the Chair of this new group Held its first meeting in December to begin its work

80 Update on the PCC at FASB

81 Private Company Standards FAF created the Private Company Council last Fall to identify and vote on potential modifications and exceptions to U.S. GAAP for private companies Billy Atkinson of Texas is the Chair of this new group Held its first meeting this past December to begin its work Two subsequent meetings held in February and May

82 ID and make exceptions and modifications in 5 areas based on differential factors (types of users, access to management, etc.) 1)Recognition and Measurement 2)Display (Presentation) 3)Disclosures 4)Effective Date 5)Transition Method Apply to PCC look-back projects and to ongoing FASB projects ID and make exceptions and modifications in 5 areas based on differential factors (types of users, access to management, etc.) 1)Recognition and Measurement 2)Display (Presentation) 3)Disclosures 4)Effective Date 5)Transition Method Apply to PCC look-back projects and to ongoing FASB projects PCC Decision-Making Framework 82 Tool for the PCC and the FASB

83 Initial Issues PCC Looking At VIEs. The requirements of FIN 46(R), codified in ASC Topic 810, Consolidation, were created in the wake of Enron’s collapse in order to prevent the hiding of liabilities on the balance sheets of dummy corporations. FIN 46(R) requires consolidation of the financial data of a VIE with the company that is the VIE’s primary beneficiary. This forces consolidation, for instance, when an owner of a small business buys property through his or her LLC and leases it back to the company. This is costly and does not necessarily create financial statements that are more helpful to users such as lenders Fair value accounting. The discussion will apply to “plain vanilla” interest-rate swaps, where FASB Statement No. 133, codified in ASC Topic 815, Derivatives and Hedging, requires costly mark-to-market accounting

84 Initial Issues PCC Looking At Recognizing and measuring various intangible assets (other than goodwill) acquired in business combinations. This discussion will include Level 3 fair value measurements and disclosures associated with them, as referenced in ASC Topic 805, Business Combinations. The PCC also plans to discuss goodwill accounting in general at a later date Uncertain tax positions. FIN 48, mostly incorporated into ASC Topic 740, Income Taxes, requires companies to record a tax liability on their balance sheets, showing how much they have in reserve in case the IRS or state tax authorities disagree with their tax positions. The calculation is time-consuming and expensive, and is thought by some to be an appropriate requirement for large public companies that are audited regularly, but less appropriate for private companies.

85 Actions at the May PCC Meeting Provide relief from separately recognizing certain intangible assets acquired in a business combination Allowing for the amortization of goodwill and a simplified goodwill impairment model Allowing two simpler approaches to accounting for certain types of interest rate swaps when a private company intends to economically convert the interest rate on its debt.

86 Exposure Period These items will go through an exposure process Hopefully these proposed alternatives will be adopted quickly to improve financial reporting for private companies The PCC will continue to look at other areas and issues for improvement They are off and running on their charge The PCC’s next meeting is set for July 16


88 New COSO Integrated Framework COSO – the Committee of Sponsoring Organizations of the Treadway Commission In 1992 issued its original “Internal Control – Integrated Framework” Recognized as the leading framework for designing, implementing and conducting internal control and assessing the effectiveness of internal control Accepted by the S.E.C. as the framework for attesting to internal control over financial reporting as required by SOX The new Framework better reflects the technology and globalization that have become an increasingly important part of the current business environment

89 Original Framework COSO’s Internal Control–Integrated Framework (1992 Edition) Refresh Objectives Updated Framework COSO’s Internal Control–Integrated Framework (2013 Edition) Broadens ApplicationClarifies Requirements Articulate principles to facilitate effective internal control Why update what works – The Framework has become the most widely adopted control framework worldwide. Updates Context Enhancements Reflect changes in business & operating environments Expand operations and reporting objectives

90 Project timetable Assess & Survey Stakeholders Design & Build Public Exposure, Assess & Refine Finalize 2010201120122013

91 Project participants COSO Board of Directors COSO Advisory Council AICPA AAA FEI IIA IMA Public Accounting Firms Regulatory observers (SEC, GAO, FDIC, PCAOB) Others (IFAC, ISACA, others) PwC Author & Project Leader Stakeholders Over 700 stakeholders in Framework responded to global survey during 2011 Over 200 stakeholders publically commented on proposed updates to Framework during first quarter of 2012 Over 50 stakeholders publically commented on proposed updates in last quarter of 2012

92 Internal Control-Integrated Framework (2013 Edition) Consists of three volumes: Executive Summary Framework and Appendices Illustrative Tools for Assessing Effectiveness of a System of Internal Control Sets out: Definition of internal control Categories of objectives Components and principles of internal control Requirements for effectiveness

93 Update expected to increase ease of use and broaden application What is not changing...What is changing... Core definition of internal control Three categories of objectives and five components of internal control Each of the five components of internal control are required for effective internal control Important role of judgment in designing, implementing and conducting internal control, and in assessing its effectiveness Changes in business and operating environments considered Operations and reporting objectives expanded Fundamental concepts underlying five components articulated as principles Additional approaches and examples relevant to operations, compliance, and non-financial reporting objectives added

94 Environment changes...…have driven Framework updates Expectations for governance oversight Globalization of markets and operations Changes and greater complexity in business Demands and complexities in laws, rules, regulations, and standards Expectations for competencies and accountabilities Use of, and reliance on, evolving technologies Expectations relating to preventing and detecting fraud COSO Cube (2013 Edition) Update considers changes in business and operating environments

95 Control Environment Risk Assessment Control Activities Information & Communication Monitoring Activities Update articulates principles of effective internal control 1.Demonstrates commitment to integrity and ethical values 2.Exercises oversight responsibility 3.Establishes structure, authority and responsibility 4.Demonstrates commitment to competence 5.Enforces accountability 6.Specifies suitable objectives 7.Identifies and analyzes risk 8.Assesses fraud risk 9.Identifies and analyzes significant change 10.Selects and develops control activities 11. Selects and develops general controls over technology 12.Deploys through policies and procedures 13.Uses relevant information 14.Communicates internally 15.Communicates externally 16.Conducts ongoing and/or separate evaluations 17.Evaluates and communicates deficiencies

96 Transition & Impact Users are encouraged to transition applications and related documentation to the updated Framework as soon as feasible Updated Framework will supersede original Framework at the end of the transition period (i.e., December 15, 2014) During the transition period, external reporting should disclose whether the original or updated version of the Framework was used Impact of adopting the updated Framework will vary by organization − Does your system of internal control need to address changes in business? − Does your system of internal control need to be updated to address all principles? − Does your organization apply and interpret the original framework in the same manner as COSO? - Is your organization considering new opportunities to apply internal control to cover additional objectives?

97 Contact COSO for Information


99 Analysis of Auditor Deficiencies in SEC Fraud Investigations Academic study funded by the Center for Audit Quality Scrutinizes the role of the external auditor in fraudulent financial reporting Covered a thirteen year period from 1998 – 2010 87 sanctions against external auditors in SEC investigations involving publicly traded companies Only 11 of the 87 instances of alleged auditor deficiencies occurred after 2003 and the passage of SOX in 2002

100 Types of Companies Size of companies involved was small with median assets and revenues under $40 million Concentrated in four key industries (40% of sample) Financial services/insurance General manufacturing Telecommunications Consumer goods manufacturing

101 Types of CPA Firms Audits performed by non-national firms – 46 Audits performed by national firms - 35 Bogus audits - 6 Of the 35 national firm cases – 9 involved audits performed by Arthur Andersen Among the 81 cases, the SEC issued sanctions against individual auditors in 80 cases and against the audit firm in 27 cases

102 Top Deficiencies Cited Failure to gather sufficient audit evidence (73%) Failure to exercise due professional care (67%) Insufficient level of professional skepticism (60%) Failure to obtain adequate evidence related to management representations (54%) Failure to express an appropriate audit opinion (47%) Most involved multiple alleged deficiencies Deficiencies similar for national and non-national firms

103 Grant Thornton

104 Survey Background Conducted April 3-24, 2013 1259 CFOs and Comptrollers participated 23% of respondents work for public companies 77% private companies 60% of the private companies earn less than $100 million in total revenue 87% of all companies have revenue of $500 million or less All types of industries participated 17% manufacturing, 15% not-for-profit, 7% technology, 5% retail

105 Topic Areas State of the economy Compensation, benefits and hiring Legislative Issues Affecting Growth

106 Economic Outlook


108 Their Company’s Prospects

109 Price Increases

110 Hiring Prospects

111 Energy Costs

112 Raw Materials Costs

113 Insurance Costs

114 Health Care Costs

115 Legislative Issues Affecting Growth

116 Complete Results on-line

117 Next Member Webcast September 18, 2013


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