Fred Timmons, TSCPA Chairman John Sharbaugh, TSCPA CEO Bob
Owen, TSCPA Managing Director, Regulation & Legislation
Slide 2
TSCPA Results
Slide 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
Slide 4
TSCPA Legislative Agenda Changes to the Accountancy Act SDSI
Sunset Renewal Margin Tax Recommendations Oppose Sales Taxes on
Professional Services
Slide 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
Slide 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
Slide 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
Slide 8
TSBPA SUNSET POSTPONED UNTIL 2019! Sunset Model
Development
Slide 9
Just because you do not take an interest in politics doesnt
mean politics wont take an interest in you. From Pericles (430
BC)
Slide 10
Bill Monitoring 1,047 bills reviewed 514 bills monitored Bill
monitoring process Legislative Advisory Executive Committee Bill
intervention Key Persons
Slide 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
Slide 12
Monitored Bill Action (Contd) 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
Slide 13
Monitored Bill Action (Contd) 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
Slide 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
Slide 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. Patricks Day
celebration is the official St. Patricks 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 Kemps ridley sea turtle is
the official State Sea Turtle
Slide 16
AICPA Council Meeting May 19-21, 2013 Washington, D.C.
Slide 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
Slide 18
This Years 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 Committees Analysis of proposals to repeal tax treatments of
domestic oil and gas exploration & development
Slide 19
Guiding Principles of Good Tax Policy
Slide 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 taxpayers
compliance costs, encourage voluntary compliance through an
understanding of the rules, and facilitate enforcement actions
Slide 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
Slide 22
Guiding Principles of Good Tax Policy Neutrality. The tax laws
effect on a taxpayers 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 jurisdictions 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 whenthat is, the system should have some level of
predictability and reliability
Slide 23
The U.S. Governments Financial Statements and the Country's
Fiscal Health
Slide 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
Slide 25
Federal budget
Slide 26
Federal financial statements
Slide 27
2012 financial statements
Slide 28
Slide 29
U.S. financial statements differ from other organizations Most
financial statements show obligations or liabilities on balance
sheet U.S. governments financial statements do not include Social
Security and Medicare Footnote disclosures Not reflected as
liabilities
Slide 30
Reality of Future Obligations These Future obligations equal:
Additional social insurance deficit - $52 trillion Cumulative
deficit - $16 trillion Total Deficit - $68 trillion
Slide 31
Key data in publicly traded companys financial statements
Slide 32
In trillions 2009201020112012 $11.5 $13.5 $14.8 $16.1
Accumulated federal deficit
Slide 33
Resources for the Public
Slide 34
Slide 35
Slide 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
Slide 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
Slide 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
Slide 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
Slide 40
Slide 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
Slide 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
Slide 43
Slide 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
Slide 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
Slide 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
Slide 47
Slide 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.
Slide 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.
Slide 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
Slide 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
Slide 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 couldnt collect taxes on
out-of-state sales
Slide 53
Slide 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
Slide 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
Slide 56
Analysis by the TSCPA Federal Tax Policy Committee
Slide 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
Slide 58
Small Independent Producers Many people often associate the oil
& gas industry with huge multinational corporations 95% of the
nations 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
Slide 59
The Webcast will return after a short break please rejoin us
then
Slide 60
Budgets and Taxes
Slide 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?
Slide 62
$715 Million Revenue Reduction
Slide 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
Slide 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
Slide 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
Slide 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
Slide 67
HB 500 Provisions (contd) 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
Slide 68
HB 500 Provisions (contd) 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
Slide 69
HB 500 Provisions (contd) New cost of goods sold deductions
Petroleum pipelines - cost of transporting non-owned products Movie
theaters - all cost of showing movies
Slide 70
HB 500 Provisions (contd) 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.
Slide 71
HB 500 Provisions (contd) 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
Slide 72
You can take your hand off your wallet! They actually reduced
taxes!
Slide 73
Slide 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
Slide 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.
Slide 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.
Slide 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
Slide 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
Slide 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
Slide 80
Update on the PCC at FASB
Slide 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
Slide 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
Slide 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 Enrons 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 VIEs 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
Slide 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.
Slide 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.
Slide 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 PCCs next meeting is set for
July 16
Slide 87
Slide 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
Slide 89
Original Framework COSOs Internal ControlIntegrated Framework
(1992 Edition) Refresh Objectives Updated Framework COSOs Internal
ControlIntegrated 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
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
Slide 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
Slide 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
Slide 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
Slide 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
Slide 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?
Slide 97
Contact COSO for Information www.coso.org
Slide 98
Slide 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
Slide 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
Slide 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
Slide 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
Slide 103
Grant Thornton
Slide 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
Slide 105
Topic Areas State of the economy Compensation, benefits and
hiring Legislative Issues Affecting Growth