In Brief: October 2010
Following through on his pledge earlier this year to try some new approaches in the international area, Internal Revenue Service Commissioner Douglas Shulman recently unveiled a realignment of the agency’s Large and Mid-Size Business Division (LMSB).
That function, to be called the Large Business and International Division (LB&I) as of Oct. 1, will reorganize its international component and bring all of its international resources — including its examiners — under the chain of command of the deputy commissioner (International). Under the jurisdiction of the deputy commissioner (International), the staff will increase from its current level of 600 to almost 1,500.
The IRS’ intention is to create a better platform on which to build its global tax compliance strategy. Housing all of its international specialists within one unit will integrate policy-makers, program designers, issue specialists and international agents into a cohesive team, with a common goal of devising and implementing an effective and efficient global tax compliance strategy.
Through this realignment, IRS executives should be more readily informed about the current issues in international tax compliance, including the latest cross-border tax-planning techniques. They will also be better equipped to distinguish legitimate from abusive actions and better organized to adjust their exam plans to challenge those transactions with little, if any, genuine business purpose in real time.
The flow of information to decision-makers will be direct rather than passing through various organizational structures with competing priorities before reaching those individuals.
This streamlined channel of communication should also provide the opportunity for the IRS to more quickly spot those areas where regulations, revenue rulings or other types of guidance are needed to plug unintended loopholes in the law.
An early warning to taxpayers of its intent to attack aggressive positions can often curb the appetite for questionable or even meritless tax return filings. By reducing the number of taxpayers that may be inclined to play at the margins or beyond, the IRS can more effectively concentrate on those inclined to do so.
On Sept. 16, the United States Senate passed the Small Business Jobs and Credit Act of 2010 by a 61-38 vote, overcoming last attempts by Republicans, who had hoped to make the research and development tax credit permanent (but the amendment failed by a 51-48 vote).
The bill was on the way to the House at press time. It’s believed to have the votes for approval that will send it to President Barack Obama’s desk for signature.
The bill was not without debate. The Senate also rejected two proposals that would remove Form 1099 requirements for reporting business transactions of $600 or more, which were enacted in the health-care bill. On the 1099 proposals, the Democrats were also divided.
Among the provisions passed by the Senate are: ■ A $30-billion lending fund for small businesses administered by small banks; ■ $12 billion in tax breaks, including a one-year extension of 50 percent bonus depreciation for equipment that goes into service in 2010; ■ Enhancement to federal programs that support very small businesses; ■ Built-in gains (BIG) tax relief — reduces the holding period of BIG assets to five years; ■ Section 179 expensing through 2011; and ■ Five-year carryback of general business credit of eligible small business with less than $50 million in revenue.
This bill represents a major success for FEI’s Committee on Private Company Policy (CPC-P), which has advocated on Capitol Hill for additional tools to help increase private companies’ access to capital. FEI specifically advocated for the 50 percent bonus depreciation and the five-year built-in-gains holding period for S Corporations, as well as other provisions included in the bill.
While the national employment picture overall remains stagnant, hiring in the accounting and finance sectors is expected to increase slightly during the fourth quarter of 2010, according to the latest Robert Half Financial Hiring Index.
Eight percent of chief financial officers interviewed for the index say they plan to hire full-time accounting and finance employees during the fourth quarter, while 7 percent expect staff reductions. Though marginal, the 1-percent increase in hiring activity is the first net increase since the first quarter of 2009. The vast majority of CFOs — 84 percent — said they expect no changes to their company’s personnel levels.
The survey found that business confidence remains strong among the group. A significant majority (86 percent) of executives who were interviewed say they are somewhat optimistic about the outlook for their businesses; of that group, 39 percent said they were very confident.
The Robert Half Financial Hiring Index is based on telephone interviews with more than 1,400 CFOs across the United States.
It is conducted by an independent research firm and developed by Robert Half International, the world's first and largest staffing services firm specializing in accounting and finance. Robert Half has been tracking financial hiring activity in the United States since 1992.
"While employers remain cautious about adding staff, more firms also are concerned they could miss out on business opportunities by not having adequate human resources in place," said Max Messmer, the chairman and CEO of Robert Half International.
Messmer added that, rising customer demands are placing added pressure on companies that made deep personnel cuts in recent years.
“Some businesses not in a position to hire full time are addressing the gap by bringing in professionals on a temporary or project basis,” Messmer said.
In a breakdown of CFOs by industry, the survey found that both the manufacturing and wholesale sectors are optimistic about their hiring plans for the fourth quarter, with a net 4 percent of executives in each industry forecasting increases in personnel levels. Thirteen percent of manufacturing respondents anticipate expanding their teams and 9 percent expect staff reductions.
In the wholesale sector, 9 percent of CFOs surveyed plan staff additions, while 5 percent indicated they expect to reduce headcount.
Corporate boards are beginning to take greater “ownership” of the risk management of their companies, according to a new study by The Conference Board.
In its most recent installment of The Conference Board Director Notes series, the organization found that those executives surveyed say they are becoming more directly involved in understanding risks facing their companies and more diligent about assigning risk oversight to the proper committee.
Board members say they are also doing a better job of benchmarking potential risks, the report disclosed.
As two additional areas of improvement generally, they cite more consistent contact and communication with the management team in order to forestall future risk-related issues and greater attention to follow-up on key risk discussions.
The report, Director Insights on Emerging Risk Oversight Practices, was produced in collaboration with Mc-
Kinsey & Co. and the Global Association of Risk Professionals and is based on a series of interviews with corporate directors on emerging board practices in risk oversight.
The pool of interview participants included 20 members of U.S. public company boards that represent a variety of business sectors, including manufacturing, high tech, real estate, food services, retail, telecommunications, air travel, energy, health care and banking. The companies range in size from revenues of $150 million to more than $30 billion.
“The financial crisis underscored the importance of risk management in the pursuit of a business strategy,” said Matteo Tonello, director of corporate governance research at The Conference Board and founder of the Director Notes series.
“Today, as companies recover from that turmoil, many corporate directors wonder if they and their boards are doing all they should to fulfill their fiduciary duty with respect to risk oversight,” he said.
The study also highlights a set of concrete, emerging best practices for boards to consider using to improve performance in the area of risk management.
“While most boards have taken on the challenge of upgrading their risk oversight capabilities, there is significant diversity across companies in their approaches,” says André Brodeur, a co-author of the report and leader of McKinsey’s enterprise risk management service line for non-financial companies.
New research by the Association of Certified Fraud Examiners (ACFE) found that identifying a perpetrator of corporate fraud is no easy task. In most cases, he or she has no previous record of criminal charges or convictions. The study determined that the typical offender is between the ages of 31 and 45, and more likely to be a man than a woman.
While it may be difficult to pinpoint someone who has committed or intends to commit fraud, the organization examined a broad range of criteria that might be helpful in developing a successful profile to deter future activity. Behavorial red flags, tenure at a particular organization and educational background are among those characteristics that can assist in limiting fraud.
The group's findings, in its 2010 Report to the Nations on Occupational Fraud and Abuse, were drawn from the results of a survey of Certified Fraud Examiners (CFEs) involved in investigating fraud allegations and cases between January 2008 and December 2009. In all, 1,843 cases of fraud were studied.
Among the report's key findings:
n High-level perpetrators cause the greatest damage to their organizations. Frauds committed by owners or other senior executives are three times more costly than frauds committed by managers and more than nine times as costly as employee frauds.
n Fraud offenders were likely to be found in one of six departments — accounting, operations, sales, executive or upper management, purchasing or customer service.
n Most of those who committed fraud were never charged of convicted previously of a fraud-related offense. Only seven percent fell into that category.
n Those who commit fraud often show signs of engaging in illicit activity. In 43 percent of cases, perpetrators were found to be living beyond their means, and 36 percent were experiencing financial difficulty.
Organization officials believe such information can assist business owners, managers, law enforcement and others with an interest in this behavior in reducing its incidence.
“Fraudsters exhibit behavioral warning signs of their misdeeds,” says ACFE President James D. Ratley. “It's important to remember that this human element of fraud, demonstrated in red flags such as living beyond one's means or exhibiting control issues, is not identified through an audit or other traditional controls.”
ACFE has been publishing reports on business fraud since 1996. The new study is available at the organization's website, www.acfe.com/RTTN.
A study by PricewaterhouseCoopers LLP finds that the number of federal class action filings in securities dropped in the second quarter of 2010, compared to the same period the previous year.
During 2010, there was a 12-percent increase in filings from the first quarter to the second, from 33 to 37. If this rate continues, an estimated 140 federal securities class actions will be filed by the end of the year, as compared to 155 filings last year. If the numbers hold, it would constitute a 10-percent drop.
In other findings, financial crisis-related filings continue to decrease, from 47 percent in 2008 to 33 last year. Accounting-related cases during the first half of 2010 represented 36 percent of filings. Cases involving merger and acquisition allegations represented 17 percent of filings, while pharmaceutical/product efficacy cases represented 10 percent of all filings. Three cases related to the Gulf of Mexico oil spill.
“Although the financial services industry, with 20 filings, continues to have the largest number of filings, the health industry, which includes filings in both the pharmaceutical and health services industries (with 17 filings) is not far behind," said Grace Lamont, principal and U.S. Securities Litigation practice leader for PwC.
By mid-year, the largest settlements have been financial crisis-related, with the Countrywide Financial Corp. at $624 million and Charles Schwab & Co. Inc. at $235 million.
Mark Walsh, the author of the Financial Reporting column in the September issue of Financial Executive, “IFRS Comes to Canada,” was incorrectly identified as a CFA. He is a FCA.