The Trusted Professional's Year in Review

By:
Chris Gaetano
Published Date:
Dec 22, 2016
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As we all prepare to face whatever 2017 has to offer, we thought it would be a good idea to look back at some of the top stories of 2016: 

Donald Trump Wins the Election

November capped off what has been characterized as one of the most acrimonious presidential campaigns in recent history, ending with a surprise upset by GOP contender Donald Trump who handily won the presidency over his Democratic opponent Hillary Clinton. While he has promised huge changes on everything from trade to taxes to foreign policy, it remains to be seen what exactly the end result will be. Trump’s rise to power has been marked by conflicts with both Democrats and Republicans, some of whom he will now need to further his agenda. Between that and his famously unpredictable personal style, it would appear the only thing we know for sure is we don’t know anything for sure. Businesses, however, have been reported as optimistic, and markets so far have reflected that, with major indices like Dow Jones hitting record highs in the aftermath.

Panama Papers Leak Reveals Complex Tax Avoidance Strategies 

A massive leak of documents from a Panamanian law firm, Mossack Fonseca, hit the Internet in spring, revealing a  vast network of shell companies used by economic and political elites from around the world to hide their assets, including the current and former leaders of Russia, Iceland, Argentina, Georgia, Iraq, Jordan, Qatar, Saudi Arabia, Sudan, United Arab Emirates, and Ukraine, as well as organized crime leaders, dictators, entertainment celebrities and plain old wealthy individuals. Major banks such as HSBC, UBS and Credit Suisse were also named in the papers as having worked with the firm to set up shell corporations for their clients. While most of the shell companies were set up for legitimate purposes, internal documents from the leak reported that selling vehicles for tax avoidance was 95 percent of its work. Beyond this, however, the leak also showed that the firm enabled activities like money laundering, bribery, and circumvention of anti-bribery controls. The revelations shook the political world, particularly in Iceland, where it was revealed that the Prime Minster, Sigmundur Davíð Gunnlaugsson, owned debt from Icelandic banks that he negotiated with during the financial crisis. Gunnlaugsson, after facing a vote of no confidence from Parliament, resigned shortly after. Tax authorities the world over were also very interested in the documents, with the IRS announcing in April that it, along with its counterparts in 40 different countries, was combing through the data to search for tax scofflaws. 

AICPA, CIMA Form New International Organization

The memberships of both the AICPA and the Chartered Institute of Management Accountants (CIMA), a worldwide professional group representing management accountants, in June approved a measure that created a new international organization called Association of International Certified Professional Accountants, which encompasses the membership base of both organizations—600,000 financial professionals worldwide. Both organizations, though, would retain their own distinct membership and governance bodies, meaning members will belong to both groups without paying additional dues. This international membership organization was formed in response to what the AICPA and CIMA saw as increasingly global challenges to the accounting profession, and so advocates for both CPAs and management accountants and provides resources to build the talent pipeline.

New FASB Nonprofit Update

In August, the Financial Accounting Standards Board (FASB) released its first major update to nonprofit accounting standards in over 20 years. The update, released on Aug. 18, was made in response to input from stakeholders who had expressed concern about what they believed were the complexity, insufficient transparency and relevance of certain aspects of the current reporting model. The new standard replaces the three-asset classification system with a two-asset one, composed of just net assets with donor restrictions and net assets without donor restrictions. It also allows organizations to choose whether they want to use the direct or indirect reporting method for cash flows (prior versions made the direct method mandatory, but feedback resulted in a softening of the FASB’s position). There are also new disclosures surrounding things like liquidity, availability of financial assets to meet cash needs; and cost allocation methodologies. The new standard is the first of two set to be released. The FASB said that this “Phase I” standard was meant to address the issues it felt would be easiest to deal with, leaving the more technically difficult proposals for an upcoming Phase II project.

New CPE Standards Allows for “Nano Learning” Units

The AICPA and National Association of State Boards of Accountancy (NASBA) in August released new continuing professional education standards to reflect the need for learning that is more personalized and on-demand. One of the major changes in the new standards is the introduction of nano learning units, which are short 10-minute lessons, usually a video, that award one-fifth of a CPE credit. The new standards also allow for “blended learning” units that combines multiple delivery methods, such as live instruction and on-demand self-study.  With the AICPA and NASBA having approved the new standards, it is now up to individual state boards of accountancy to decide whether they want to adopt them. New York’s board is considering adopting a modified version that limits nano learning credits to five per CPE cycle, which was a suggestion the Society had advocated for in its comment letter when the changes were first proposed.

Firms Scramble to Implement Revenue Recognition and Lease Standards

The FASB’s landmark revenue recognition standards, after being postponed by a year, is set to finally come into effect for public companies at the end of 2017. The new standards will replace the myriad industry-specific guidance in the accounting literature with a singular revenue model based on identifying and fulfilling performance obligations. While the changes will be wide-reaching across virtually all industries, firms are struggling to implement the standards, with a recent survey of business executives finding only 13 percent of firms actually in the process of doing so, versus the 22 percent who haven’t even started assessing the impact it will have on them. One possible reason might be that, at the same time, firms are also working to implement the new lease standards, which goes into effect for public companies the following year. The lease standards, most significantly, place lease obligations on the balance sheet as both an asset representing the right to use the leased property and a liability representing the lease payments over time. While not as far-reaching as the revenue recognition standard, the changes will call into question things such as the status of debt covenants, leasing strategies, and potential systems changes. Another survey has found that, so far, only 3 percent of companies have already started implementing the new standards.  

IRS Impersonation Scams Evolve

The IRS warned this year that scammers have tax preparers in their sights and told them to prepare for what they said would be a wave of attacks custom tailored just for them. One such scam cropped up this past August, where someone posing as a tax software provider would send an email trying to convince the preparer to download an important software update that, in truth, was a key logger meant to find out passwords. Another more recent one tries to trick practitioners into thinking they need to update their IRS e-services account information and directing them to a fake website made to look like the IRS's. Professionals also found themselves targeted for attacks meant to take over their computer system, enabling scammers to file false tax returns and pocket the refunds for themselves. In response to these issues, IRS launched a new campaign intended to provide fact sheets and tips on security, scams and identity theft protection measures aimed at tax professionals.

Treasury Curbs Inversions

The Treasury Department, in response to what it felt were abuses of the system, released rules this year to curtail the practice of tax inversion, that is when a U.S. company merges with a foreign company so it can relocate its headquarters out of the country and away from U.S. tax jurisdiction. The new rules, released in their final form in October, focus mainly on earnings stripping, which is when a company performs an inversion and then lends money to its U.S. branch, which is now a subsidiary. Under these new rules all of these transfers as equity transactions, which would mean they would be taxed at the higher U.S. rate. The regulation does provide a number of exceptions, such as exempting cash pools and short-term loans that multinational firms routinely use to manage cash among their affiliates. It also exempted situations where there is little risk of earnings stripping, such as transactions between S-corporations or transactions between regulated insurance companies. The Treasury Department said that it believes these exceptions fulfill the goal of targeting only practices affiliated with problematic corporate inversions while leaving ones associated with legitimate businesses practices intact. However the new Republican administration has vowed to roll back regulations, making the future of these new rules uncertain, as the new president has said he prefers to keep companies in the country through incentives like a lower tax rate.

The Rise of Ransomware

The business world’s embrace of the Internet has created countless new opportunities but also new dangers, something that has become painfully apparent by 2016. One threat in particular has been the growing prevalence of what’s called “ransomware,” a type of malicious software that locks your data and won’t release it until the user pays a ransom.  An analysis from Kasperski Labs, a computer security consulting firm and antivirus software developer, said that ransomware attacks have increased three-fold from January to September 2016, with new attacks against businesses going from one every two minutes to one every 40 seconds. Perhaps the reason such attacks are growing is because they’re effective: IBM said that nearly half of all business executives have experienced ransomware attacks in their workplaces, and of those executives, 70 percent said their company simply paid the ransom. Of those who paid, according to IBM, half paid over $10,000 and 20 percent paid over $40,000. Another could be the poor state of cybersecurity for many businesses. A KPMG survey this year found that 81 percent of executives said their businesses had been compromised by a cyberattack over the last two years, yet despite this only 49 percent have invested anything at all into cybersecurity in the same time period. This is echoed more precisely by a study by Deloitte this year which found that most businesses devote between 0 to 2 percent of their IT budgets to cybersecurity. It may be prudent for businesses to step up security, as MalwareBytes Labs, creators of the popular anti-malware software MalwareBytes, said that the trend is far from slowing down and, indeed, that attacks will become even more sophisticated and advanced over the next year.  

Blockchain Captivates the Financial World

Bitcoin was just the beginning. Blockchain, the technology that makes virtual currencies like Bitcoin possible, started attracting serious attention this year from major players in the financial world who are just starting to see its potential. It main appeal has been its ability to create and confirm true peer-to-peer transactions without any third part intermediary through the automated creation of ledgers that are nigh impossible to tamper with in any way. Earlier this summer, representatives from each of the Big Four firms met to discuss the implications this could have on things like audit, regulatory compliance and taxes and explore the possibility of forming a consortium that would let them check data against each other. A Deloitte paper written in March said its application to the accounting world could represent a shift as dramatic as the move to double-entry bookkeeping. Instead of keeping separate records based on transaction receipts, companies can write their transactions directly into a joint register, creating an interlocking system of enduring accounting records that are near impossible to falsify. It could theoretically also lead to things like real-time audits and seriously change the nature of fraud investigations. While such applications are only theoretical so far, businesses are eager to turn them into reality, with PwC reporting that over $1.5 billion has been invested in blockchain companies in the last year alone.

 

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