And the Survey Said?
In a recent survey, the AICPA polled some 577 CPA firms with the question of “what is your chief business concern?” A compelling question to be sure, and the answers are telling of our current economic situation. However, in our review of the survey and the accompanying analysis by the AICPA, we began to wonder if the survey was asking the wrong question. As evidenced by the survey itself, the issues brought up by the firms are indicative of the times we’re in. But, based on a review of prior surveys, this year’s top concerns probably won’t be the same as next year’s concerns (just take a look at the top concerns in 2009 or 2007). In order to find out what really troubles CPAs, instead of asking what concerns them, we might ask a more specific and telling question. How about this: “As a leader in a CPA firm, what issues keep you up at night?” Likely the answer to this question is far different than simply “What are your biggest concerns as a CPA?” Now, that would be an interesting survey.
I’ll tell you one thing that sometimes keeps me, as a leader of my CPA firm up at night is a worry that we made a mistake on something, or we missed some issue we should have caught. We don’t do attest work; we are state and local tax consultants—that’s all we do.
What Keeps You Up at Night?
I’d be willing to bet it’s not state and local tax—and that’s understandable. But let me tell you why it might need to be especially for your attest clients and what you can do about it.
Don’t get me wrong, all in all, we did find the article very useful, and a near comprehensive list of what we would call the top concerns CPAs have (the survey). For example one of the major concerns especially for smaller firms, is dealing with the ever growing and evolving complexity of tax law. And they’re probably referring to changes in the federal tax law. I sympathize with CPA’s on this. We haven’t kept up at all with the federal law in the last 20 years. We focus all our attention on state and local tax and it’s hard enough to keep up with this area. Merely staying on top of these changes is a full time job, let alone spending time using that knowledge in performing client work. To go along with the knowledge of the law, we must be knowledgeable about the various solutions that technology provides. When new and innovative technological solutions present themselves, we can find ourselves out of touch and out of a client when we fail to inform ourselves about new available software solutions.
Another concern that ranked in each category of the survey was the concern to remain competitive with fees and the pricing of services. In addition, firms were concerned with the compressed nature of the tax season that takes place in the weeks and months preceding the April due date for personal income taxes. And while these concerns are relatively constant throughout the years, the most important concern to CPAs in the 2011 survey, at least to firms in the 2-20 professionals’ size range, was bringing in new clients. For firms larger than 20 professionals, new clients ranked as the second major concern, and for sole proprietors, it ranked as the third major concern.
Contrast these outcomes with that of the 2009 survey and the results are interesting. In 2009, the survey recorded a unanimous number one concern across the board—retention of current clients. While client retention remains an important priority in 2011 (it ranked no lower than 3rd in all groups) the change leads us to make some interesting observations. To quote the AICPA release about the survey, “Whereas survival was the top priority in 2009, at the height of the recession, the seeking and signing of new clients has taken on greater importance across the board as firms attempt to find growth opportunities in an uneven economic recovery.”
But, What Else Should CPA’s be Worried About That Wasn’t on the List?
Now, we’re not disputing that growth is an important concern right now, however we mentioned one concern that we feel should be added to the list. And as far as concerns go, this one is big. To put it another way, how many of the concerns previously listed, whether complexity of the law, new technology, pricing of services, the seasonal nature of the business, or even client retention and growth, would you potentially lose sleep over? Probably none. Yet many of us have experienced that awful, restless night after the realization of a material mistake. Now because they don’t happen every day, they don’t always jump to the front of your mind in that quarterly strategy/growth meeting, but they are absolutely a major concern. That gnawing, nagging concern that lingers and hovers over all we do as CPA’s. And when it comes to what gets our heart rate up, or spikes our blood pressure, nothing gets us going quite like this. After all, if we mess up it’s our fanny in the fire.
Specifically the mistakes I’m referring to have to do with attestation work. Attest work is a type of service CPA’s offer—attesting to the veracity and accuracy of financial statements. It is a heavy burden. One major reason why companies hire CPA’s to do attestation work is because they’re required to do so, either by a bank or other creditor or by some other party. Companies don’t usually hire a CPA to do attestation work for their own internal review purposes. It’s because they’ll be using the documents for a third party. CPA’s know this and that’s why CPA’s are extra concerned when it comes to attest clients.
When CPAs do attestation work or audits, the last thing they want to know is that they missed something. What would they be worried they are going to miss? Revenues? Sure. Revenues must not be overstated or “managed” artificially. What CPA’s are usually even more worried about though, is missing or understating some liability—some liability that isn't on the balance sheet, but should be. It's easy to review things already on the balance sheet. The company says, “Yes we've got this inventory, and we have these accounts payable.” CPA’s can confirm those. But what if you miss liabilities that aren't on the balance sheet? And what if those liabilities are material to the financial statements? That’s the big worry.
We knew a CPA firm who had a 30 year client. (Please note: We’ve changed the facts so that neither the firm nor their client is recognizable, and the good news is that the situation was caught and resolved in time. This client was a family-owned distributor business. The CPA firm did audit work for them for 30 years because the company maintained certain loans with the bank where they had to maintain certain covenants or the bank could call in the loan. Everything had been going fine. That is until their client was approached by another company with a buyout offer.
While performing their due diligence, the buyout firm issued a nexus questionnaire to the company and discovered they had nexus for sales tax all across the nation based on the activities of independent sales reps. At this point the buyout firm asked, “Don’t you know that independent reps give you nexus and you should have been collecting sales tax all along?”
If a company sells something that’s taxable and they have nexus in a state, they need to be licensed to collect the appropriate tax. And they need to actually collect it and remit it. If they don’t collect it from their customers at the time of the transaction, the state will eventually find them and get the money from the seller. When this happens, it’s often too late or too difficult to go back to the customers and the liability shifts to the selling company. Many companies are unaware of this fact. And one thing they’re also shocked to find out is that the state can legally go back to day one and many in fact routinely go back 10 years if they find you.
In this case, the buyout firm went and checked back over the previous three years and found the company’s exposure was around $15 million. For purposes of simplification, let’s estimate that $15 million was roughly half the sales price of the company. There you have roughly half the worth of the company being eaten up by a potential liability of $15 million, and that only goes back three years! And really, with the company not being registered, realistically you could calculate roughly 7-10 years of liability which would have made the whole company insolvent.
Now put yourself in the shoes of the CPA firm. You’ve been giving clean opinions all along for the last 30 years. It makes your stomach turn. If that liability is real, you are in a world of hurt because now you know about it, and are duty, ethically and possibly legally bound (think of Enron and Arthur Andersen) to disclose the liability and insist the client put it on the balance sheet which may mean they are in violation of the loan covenants, which may mean the bank has to call their loan. If the bank can’t collect the loan they’re going to come to you. In addition, you have to face the extremely difficult conversation that will inevitably come where your client asks, “Why didn’t you tell us the activities we were performing gave us nexus and we should have been collecting tax?” There is no good answer to that question.
Thankfully, all’s well that ends well and this situation was resolved satisfactorily because of a series of actions including taking advantage of the SSTP amnesties and strategic voluntary disclosures that we were able to recommend. But, in some respects, the client was lucky that they met some pretty stringent requirements, and lucky is probably the best description for how they dodged this bullet.
So how can you avoid this potential disaster? Well hopefully the solution is obvious. Get informed! Learn more about how the changing environment regarding nexus could be threatening your clients. Learn about the biggest tragedy in sales tax and why nexus is even an issue and what are the typical nexus creating activities. All of these resources are available at no charge.
Returning to the AICPA survey, firms ranging from the sole proprietor to firms of 20 professionals listed “keeping up with changes and complexity of the tax laws” as one of their top ten concerns. Why is this a top concern? Because it relates to a bigger, underlying concern, the concern that transcends good and bad economies, the one that keeps us up at night—that we could potentially miss something big. No one wants to miss a material item. Thankfully in this case getting informed is just as simple as employing a simple nexus questionnaire, similar to the one given to the manufacturing firm. If you would like a copy of a questionnaire, let us know and we would be happy to make one available. Or for more information about nexus in general, feel free to contact Peisner Johnson & Company at our website, attend one of our complimentary webinars on nexus, or just give us a call at 800-940-9433.
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