Letters to the Editor

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Support for the SET Tax Proposal

Lou Grumet’s proposal, that everyone be required to file a tax return (Publisher’s Column: “Fixing the Income Tax: Transparency and Simplicity,” June 2005), is excellent. The benefit that he mentioned of reducing tax-evasive behavior is very important, with psychological and citizenship byproducts that would help our country immeasurably.

The project, however, would require a bold legislature. Of course, if the Simple Exact Transparent (SET) tax is adopted, I will get my wish. If, as is more likely, it is not adopted, then this meritorious idea will have to swim on its own, a daunting prospect.

Stanley Goldstein, CPA
Scarborough, N.Y.


FASB Biased?

Thank you for Dennis Beresford’s article, “Can We Go Back to the Good Old Days?” (December 2004). Those of us who are neither partners of public accounting firms nor members of FASB have been complaining about unnecessary complexity for years. Yet drafts, standards, interpretations, and concept statements continue to multiply and become ever more complex. Modern accounting standards include complicated mathematical models to support far-reaching assumptions and predictions.

I suggest that this trend is largely due to the composition of FASB. The current seven-member board consists of academics, technical analysts, and—the largest group—former partners and managers of public accounting firms. The board has one member from the preparer community, but people who actually use financial statements to make lending and investment decisions are not represented.

Given the current makeup of FASB, it is no surprise that rulings are biased towards more complex, theoretical pronouncements. Accounting complexity serves to enhance the importance (and income) of professors, technicians, and auditors.

Martin Steine, CPA

Editor’s Note: At present two of FASB’s seven board members, George J. Batavick and Leslie F. Seidman, were formerly preparers. Batavick’s positions at Texaco included comptroller. Another current board member, Donald M. Young, has used financial statements in a variety of analyst positions at companies, including PaineWebber/UBS and Lehman Brothers.

This diversity among its board members’ experience has generally been in evidence for most of FASB’s history since it was established in 1973.

 
Fixing Social Security

I’m responding to Eric Rothenburg, whose response to Theodore Gruber was published in “Inbox: Letters to the Editor” (June 2005). With regard to investment returns over the five years ended March 31, 2005, I would like to note that the average large-cap blend fund listed on the Morningstar database (1,624 different mutual funds) returned –2.88% per year. Compounded annually, that means $10,000 invested five years ago would be worth $8,641 today, for a total loss of 13.6%.

If Mr. Rothenburg has lost the 50% to 60% he claims, he is a) incredibly unlucky, b) taking on way too much speculative risk with his investments, or c) misreading his statements and his performance altogether. Had Rothenburg invested in the average of the 135 largest large-cap blend funds with assets in excess of $1 billion each, his five-year average annual rate of return would have been –1.89% and his 10-year average rate of return would have been 10.57%, turning the $10,000 into $27,313 over the 10-year period.

His short-term thinking and exaggeration is the cause of the typical American investor’s failure to reap the rewards of investing. If you would like to see what really happens when disciplined actions are taken by a typical retiree, the Microsoft Excel spreadsheet shown in the Exhibit is a record of actual results achieved by a retiree participating in a 401(k) plan that I oversee.

Timothy S. Wyld, CPA
Manager of Compensation and
Retirement Plans
Latham, N.Y.

 
The author replies:

Unfortunately, the 50% loss in equity holdings is true. I monitor it every day to see if it will ever go above that threshold.

I was told in January 2000 that the dot-com craze was going to expand even more. I invested money in two high-growth funds: Putnam Voyager Fund and Putnam Growth and Opportunities Fund. If you remember, the NASDAQ index reached 5250 in March 2000. Right now, the NASDAQ is at 2100. Using the percentage change formula, that is a net loss of 60%. To compound things further, these funds generally were invested in stocks that paid no dividends to mitigate the capital losses.

I believe that the longer the time horizon, the less these losses will be. However, five years later, I am still –50%. Oil prices have now reached $60/barrel, and inflation and interest rates are increasing. We cannot assume that future events are dependent upon past events. If they were, everyone would have invested in the Dow components of 50 years ago. Looking at AT&T and General Motors, we can infer that these are not mathematical equations that will always hold true.

Luckily, only 10% of my portfolio was in the aforementioned Putnam funds. However, what if I was now ready to retire and I had 100% of my funds in these funds? And I am a CPA. Can ordinary investors be hoodwinked the way I was? You better believe so.

Simply put, let’s keep Social Security intact. We cannot play Russian Roulette with retirement money. If you are wealthy and lose, so what? Your investments are almost certainly diversified. The working-class and middle-income people, however, might not be able to sustain such a loss. That is why privatizing Social Security is definitely the wrong way to go. We have already seen that privatization has been unsuccessful in other countries. Let’s think about income demographics besides the rich for a change. Then, we will see a well-balanced and -fueled economy. The “trickle-down” theory of supply-side economics has never worked and never will.

Eric Rothenburg, CPA
Associate Professor
Kingsborough Community College
City University of New York


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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