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Week of September 2, 2016

IRS Provides Safe Harbor for Business Use of Property Financed with Tax-Exempt Bonds

( Accounting Today ) August 26, 2016 – The Internal Revenue Service is offering a safe harbor for businesses using property that has been financed with tax-exempt bonds. Revenue Procedure 2016-44 provides safe harbor conditions under which a management contract does not result in private business use of property financed with governmental tax-exempt bonds under Section 141(b) of the Tax Code or cause the modified private business use test for property financed with qualified 501(c)(3) bonds under Section 145(a)(2)(B) to be met. Section 141(b) generally provides that an issue meets the private business use test if more than 10 percent of the proceeds of the issue are to going to any private business use, such as a trade or business carried on by any person other than a governmental unit.

New Procedure Helps People Making IRA and Retirement Plan Rollovers

( IRS ) August 24, 2016 – The Internal Revenue Service today provided a self-certification procedure designed to help recipients of retirement plan distributions who inadvertently miss the 60-day time limit for properly rolling these amounts into another retirement plan or individual retirement arrangement. In Revenue Procedure 2016-47, posted today on IRS.gov, the IRS explained how eligible taxpayers, encountering a variety of mitigating circumstances, can qualify for a waiver of the 60-day time limit and avoid possible early distribution taxes. In addition, the revenue procedure includes a sample self-certification letter that a taxpayer can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver.

Top 3 Practice Management Concerns for CPA Firms to Tackle

( AccountingWEB ) August 26, 2016 – Much of the discussion in the accounting industry today pivots around how global markets impact practice management and client service. But when asked about the top concerns among accounting firm leaders, BKR International, a global public accounting association, cited an overwhelming focus on the following three.

How the 401(k) is Wreaking Havoc on Retirement

( Denver Post ) August 28, 2016 – The shift from pensions to 401(k) plans is making retirement inequality much worse - and education is what separates the haves from the have-nots, a new study has found. College graduates have always been able to get better jobs. What’s new in recent decades is that traditional pensions have all but vanished, replaced by 401(k)-style plans. In 1980, 38 percent of private sector workers had a pension and 19 percent a 401(k). By last year, according to the U.S. Department of Labor, the numbers had more or less reversed-just 15 percent had a pension and 43 percent a 401(k). That shift is creating “double disadvantages for the less educated,” wrote University of Kansas sociology professor ChangHwan Kim and Social Security Administration researcher Christopher Tamborini in a paper presented at the American Sociological Association’s annual conference on Tuesday.

New Security Summit Video Warns Tax Pros of Cybercriminal Threats; Urges Precautionary Steps

( IRS ) August 30, 2016 – As part of the ongoing Security Summit efforts, the Internal Revenue Service today released a new YouTube video urging tax professionals to take the necessary steps toward guarding their data and protecting clients from identity theft. The video featuring IRS Commissioner John Koskinen warns tax professionals that cybercriminals increasingly are targeting their offices and their data. The video spotlights the "Protect Your Clients; Protect Yourself" campaign recently launched by the Security Summit. The campaign seeks to raise awareness about cybercriminal activity and provide tax professionals the information needed to improve safeguards. A series of fact sheets and tips on security, scams and identity theft prevention measures for the tax professional community will be released throughout this summer and fall.

GAO Issues Second Annual Conflict Minerals Report

( JDSupra Business Advisor ) By Cydney Posner, August 31, 2016 – The GAO has issued its annual conflict minerals report to Congress, entitled “Companies Face Continuing Challenges in Determining Whether Their Conflict Minerals Benefit Armed Groups.” The GAO is required to report annually on the effectiveness of the SEC’s conflict minerals rule in promoting peace and security in the DRC and adjoining countries (the “covered countries”) as well as on the rate of sexual violence in war-torn areas of the covered countries. This report is particularly instructive in outlining the many challenges to supply chain due diligence arising out of fraud risk associated with reliance by processing facilities on documentary evidence from upstream stakeholders and compounded by the complexity of processing operations. If the title of report didn’t clue you in, the bottom line is that, although the GAO’s reviews “indicate some progress in companies’ efforts to comply with some key provisions of the rule, they also indicate that companies continue to face some challenges in their supply chain due diligence efforts.” For most companies, the sources of their conflict minerals remain a mystery.

How to Mitigate the Threat of Ransomware

( CFO ) August 31, 2016 – All too often, companies’ focus after being victimized by a ransomware attack is on the ransom paid, which is generally the most trivial outcome of the incident. From the perspective of a CFO, what goes unaccounted for in any meaningful way is the lost productivity, lost profits, harm to business reputation, cost of reconstructing data, and other damages that flow from these attacks. While state and federal laws may require breaches of privacy to be reported, that’s not the case with ransomware attacks. As such, a significant number go completely unreported and unpublicized, so the true extent of the damages caused remains a mystery. In some cases the ransomware attack is just one prong in a multi-pronged attack on an organization’s infrastructure, making it almost impossible for even the victim company to determine the specific impact of the ransomware. So, in short, CFOs are struggling to understand the financial impact of these attacks. To help them better understand, and to mitigate the impact, this article discuss the types of harm and damages and makes specific recommendations for better controlling security risks, including the use of cyber-liability insurance.

GASB Proposes Guidance for Debt that is Extinguished Early Using Only Existing Resources

( GASB ) August 29, 2016 – The Governmental Accounting Standards Board today proposed guidance that state and local governments would apply when extinguishing debt prior to its maturity. Specifically, the Exposure Draft, Certain Debt Extinguishment Issues, proposes guidance for transactions in which only existing resources are placed in a trust for the purpose of extinguishing debt. Current GASB standards provide guidance on how to account for and report when the proceeds of refunding bonds are placed in a trust for the future repayment of outstanding debt. However, the standards do not apply when only existing resources (in other words, other than bond proceeds) are placed in a trust for the future repayment of outstanding debt. Consequently, governments could account for what is essentially the same transaction in two different ways.

How to Tackle the 5 Biggest Intercompany Accounting Challenges

( CGMA ) August 26, 2016 – Businesses of any size can encounter intercompany accounting challenges. Additional challenges arise during global expansions, as the supply chain becomes more complex, or when the entity has gone through a merger or acquisition. Intercompany accounting can be difficult because it deals with money that flows across multiple legal entities of a company. A 2016 Deloitte poll of more than 3,800 accounting and finance professionals suggests that disparate software systems in the different legal entities pose the biggest problem (21.4% of respondents), followed by intercompany settlement (16.8%), complex intercompany agreements (16.7%), transfer-pricing compliance (13.3%), and foreign exchange exposure (9.4%).

Post-Implementation Review Concludes GASB’s Pollution Remediation Statement Achieves Purpose

( Accounting Foundation ) August 23, 2016 – A Post-Implementation Review of Governmental Accounting Standards Board Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations (issued 2006), concluded that Statement 49 accomplished its objectives of providing more consistent, timely, and complete reporting of pollution remediation obligations by state and local governments. “The PIR report on Statement 49 tells us that, overall, the standard provides creditors and other users of financial statements with useful information,” said GASB Chair David A. Vaudt. “The GASB acknowledges the issues raised by some governments in applying certain provisions of the Statement, and will consider those issues when addressing the provisions in the future.”

IRS Provides Safe Harbor for Business Use of Property Financed with Tax-Exempt Bonds

( Accounting Today ) August 26, 2016 – The Internal Revenue Service is offering a safe harbor for businesses using property that has been financed with tax-exempt bonds.

Revenue Procedure 2016-44 provides safe harbor conditions under which a management contract does not result in private business use of property financed with governmental tax-exempt bonds under Section 141(b) of the Tax Code or cause the modified private business use test for property financed with qualified 501(c)(3) bonds under Section 145(a)(2)(B) to be met.

Section 141(b) generally provides that an issue meets the private business use test if more than 10 percent of the proceeds of the issue are to going to any private business use, such as a trade or business carried on by any person other than a governmental unit.

Under the safe harbor, the payments to the service provider under the contract need to be reasonable compensation for the services provided during the term of the contract. Compensation can include payments to reimburse expenses paid by the service provider and administrative overhead. The contract should not provide a share of net profits from operating the managed property to the service provider and it should not impose upon the service provider the burden of bearing any share of net losses from operating the managed property.

The term of the contract, including all the renewal options, should be no more than either 30 years or 80 percent of the weighted average reasonably expected economic life of the managed property. A qualified user needs to exercise a significant degree of control over the use of the managed property, such as approving the annual budget, capital expenditures, each disposition of property, rates charged for use of the property, and the general nature and type of use of the property. The user must also bear the risk of loss upon damage or destruction of the managed property.

The service provider needs to agree it isn’t entitled to any tax position that’s inconsistent with being a service provider to the qualified user of the managed property. For example, the service provider must agree not to take any depreciation or amortization, investment tax credit, or deduction for any payment as rent on the managed property.

The service provider also must not have any role or relationship with the qualified user that, in effect, substantially limits the qualified user’s ability to exercise its rights under the contract, based on all the facts and circumstances.

As a safe harbor, a service provider will not be treated as having a role or relationship if no more than 20 percent of the voting power of the qualified user’s governing body is vested in the directors, officers, shareholders, partners, members, and employees of the service provider. The governing body of the qualified user also should not include the CEO of the service provider or the chairperson (or an equivalent executive) of the service provider’s governing body; and the chief CEO of the service provider should not be the CEO of the qualified user or any of the qualified user’s related parties.

New Procedure Helps People Making IRA and Retirement Plan Rollovers

( IRS ) August 24, 2016 – The Internal Revenue Service today provided a self-certification procedure designed to help recipients of retirement plan distributions who inadvertently miss the 60-day time limit for properly rolling these amounts into another retirement plan or individual retirement arrangement (IRA).

In Revenue Procedure 2016-47, posted today on IRS.gov, the IRS explained how eligible taxpayers, encountering a variety of mitigating circumstances, can qualify for a waiver of the 60-day time limit and avoid possible early distribution taxes. In addition, the revenue procedure includes a sample self-certification letter that a taxpayer can use to notify the administrator or trustee of the retirement plan or IRA receiving the rollover that they qualify for the waiver.

Normally, an eligible distribution from an IRA or workplace retirement plan can only qualify for tax-free rollover treatment if it is contributed to another IRA or workplace plan by the 60th day after it was received. In most cases, taxpayers who fail to meet the time limit could only obtain a waiver by requesting a private letter ruling from the IRS.

A taxpayer who missed the time limit will now ordinarily qualify for a waiver if one or more of 11 circumstances, listed in the revenue procedure, apply to them. They include a distribution check that was misplaced and never cashed, the taxpayer’s home was severely damaged, a family member died, the taxpayer or a family member was seriously ill, the taxpayer was incarcerated or restrictions were imposed by a foreign country.

Ordinarily, the IRS and plan administrators and trustees will honor a taxpayer’s truthful self-certification that they qualify for a waiver under these circumstances. Moreover, even if a taxpayer does not self-certify, the IRS now has the authority to grant a waiver during a subsequent examination. Other requirements, along with a copy of a sample self-certification letter, can be found in the revenue procedure.

The IRS encourages eligible taxpayers wishing to transfer retirement plan or IRA distributions to another retirement plan or IRA to consider requesting that the administrator or trustee make a direct trustee-to-trustee transfer, rather than doing a rollover. Doing so can avoid some of the delays and restrictions that often arise during the rollover process. For more information about rollovers and transfers, check out the Can You Move Retirement Plan Assets? section in Publication 590-A or the Rollovers of Retirement Plan and IRA Distributions page on IRS.gov.

Top 3 Practice Management Concerns for CPA Firms to Tackle

( AccountingWEB ) August 26, 2016 – Much of the discussion in the accounting industry today pivots around how global markets impact practice management and client service. But when asked about the top concerns among accounting firm leaders, BKR International, a global public accounting association, cited an overwhelming focus on the following three:

1. Security awareness. Financial advisory firms of all sizes are actively targeted by hackers in search of client data, according to a top cybersecurity threats report by BKR International last year, in tandem with the Identity Theft Council in California. Public accounting firms – at least in the United States – may be required in the future to comply with minimum federal data security standards.

Currently, the federal security regulations that exist apply to specific industries, such as health care (Health Insurance Portability and Accountability Act), financial institutions (Gramm-Leach-Bliley Act), and federal agencies (Homeland Security Act), said BKR Executive Director Maureen Schwartz. Congress has tried to pass several bills in recent years that expand on cybersecurity regulation, but there is debate about whether the solution is more government regulation or more private-sector innovation, she added.

In the meantime, firms should have a few standards of their own in place to mitigate risks against hackers, as well as to minimize legal liability risks. Document-retention policies, reviewed written communications protocols, technology upgrades, and, most importantly, staff training top BKR’s list.

Employees pose the single-biggest cybersecurity risk, according to BKR.

“Because many employees now use mobile devices or may access a system from home, risk management has expanded beyond the office,” Schwartz said. “Firms need to be aware of how employees are using hardware and software, how they are accessing sensitive data and communicating sensitive data, and even how they are saving data.”

Training and behavioral change, she added, are often the best defense against cyberthreats.

2. Multigenerational engagement. Most companies have experienced the challenge of managing up to four generations of employees: the founding and part-time traditionalists, the executive and immersed baby boomers, the results-oriented Generation Xers, and the agile millennials, according to BKR. Understanding the perceptions and expectations of each generation isn’t easy, but it’s important to recognize that all of them contribute something significant to your firm, Schwartz said.

Every firm should understand the generational composition of its staff and educate leaders on how to adapt policies, processes, and opportunities to support full engagement, BKR advises. There’s a wealth of information out there to learn about each generation of employee. It’s also critical, according to BKR, to communicate regularly about generational attributes and differences to enhance team communication and collaboration, and consider including multiple generations on teams for richer solutions.

“My philosophy is that everyone is inherently different, and as long as we understand that and listen to the preferences of each person, we manage expectations,” said Jason Tonjes, CPA, managing partner at Bland & Associates PC in Omaha, Nebraska.

Tonjes, a former chairman of the BKR International Americas Region, said the biggest generational difference he sees on a daily basis is the preferred form of communication. Younger generations are more tied to technology and provide quick responses to texts, instant messages, and emails, but they are less likely to reach out by phone or in person.

One often-overlooked quality of this communication style? “They are rarely unplugged. Whether that is good or not is up to them,” Tonjes said. “But they typically work just as hard as the older generations who like to grind it out in the office.”

Bland & Associates takes a simple and direct approach to melding its multigenerational staff, according to Tonjes. The firm engages a behavioral psychologist for yearly training (which includes profile testing and education on generational preferences) and additional consultation when needed.

“This individual has helped everyone learn to understand each other; not just Gen X understanding millennials, but vice versa as well,” he said.

Never underestimate the impact generational staffing can have on your firm, BKR officials say. If your firm’s demographics trend a little older or a little younger, for example, this can impact your ability to grow, retain staff, or relate to clients. Firms can look for ways to balance out the age range in their recruitment and retention efforts.

Make sure younger employees understand the opportunities for skill building and professional advancement, while midcareer employees can anticipate new and challenging engagements. All staff should be actively engaged in the firm’s vision and growth strategy.

3. Anticipating what’s next. Anticipation will also play a key role in client services going forward, as clients increasingly look to their CPAs to get beyond reactive or transactional relationships and help them prepare for the future.

The challenge with this shift is that partners and managers are often just as bogged down with daily compliance service deadlines as the teams they oversee. Lack of capacity makes it difficult to see the forest for the trees and focus on the future inside the firm, let alone consult about it with clients, Schwartz said.

But anticipating the future is a critical core competency that forward-thinking firm leaders must integrate with their service offerings, their staff development, and their approach to client relationships. Clients expect regular delivery of value, translated as new ideas, risk mitigation, assessment, strategizing, and foresight.

Accounting has traditionally been about recording the past, but internationally minded accounting firms understand the importance of using that historic data to make effective business decisions now while also projecting what’s next, BKR officials say.

“CPAs are now expected to be their clients’ business partners, advisors, and counselors for both corporate and personal financial decisions,” said David Goldner, CPA, chairman of the BKR International Americas Region and managing partner at Baltimore-based Gross Mendelsohn. “Clients want their CPA to understand their business and help them anticipate change.”

Moving forward in the era of “big data,” CPAs are being called upon to mine that data to offer value-added services, like strategic planning and succession planning, as well as wealth management advisory services. They can help business owners make decisions at every stage of business – and many personal financial decisions, too.

CPAs can, for example, help clients strategize on a real-estate transaction from both an estate planning and business tax perspective. They may advise on risk mitigation involving cybersecurity or internal-controls issues through their firm’s IT consulting or outsourced CFO services.

“Accounting firms are among the best at collecting and analyzing all of this data,” Schwartz said. “It will be their job to help clients protect it and anticipate how businesses can best leverage it.”

How the 401(k) is Wreaking Havoc on Retirement

( Denver Post ) August 28, 2016 – The shift from pensions to 401(k) plans is making retirement inequality much worse — and education is what separates the haves from the have-nots, a new study has found.

College graduates have always been able to get better jobs. What’s new in recent decades is that traditional pensions have all but vanished, replaced by 401(k)-style plans.

In 1980, 38 percent of private sector workers had a pension and 19 percent a 401(k). By last year, according to the U.S. Department of Labor, the numbers had more or less reversed-just 15 percent had a pension and 43 percent a 401(k).

That shift is creating “double disadvantages for the less educated,” wrote University of Kansas sociology professor ChangHwan Kim and Social Security Administration researcher Christopher Tamborini in a paper presented at the American Sociological Association’s annual conference on Tuesday.

The authors analyzed surveys linked to W-2 tax data to figure out how much Americans with varying levels of education were saving in their retirement accounts.

Among workers who hold similar jobs with the same pay and who both contribute to 401(k) plans, a college graduate tends to save 26 percent more than a worker with just a high school diploma, the study concluded.

Workers with college degrees aren’t only far more likely to hold jobs that offer retirement plans. When offered the plans, they’re also far more likely to sign up and to contribute enough to retire comfortably.

The median private sector worker without a college degree is contributing nothing to a retirement plan, while the median college graduate pitches in more than $2,000 a year, the study found.

One reason is that less educated workers are likelier to hold lower-paying jobs that don’t offer retirement plans. According to the study, 83 percent of workers with a bachelor’s degree have access to some kind of retirement plan-compared with 62 percent of high school graduates and 43 percent of high school dropouts.

Even when they are offered 401(k)s, less educated workers find it much more difficult to take full advantage of them.

One advantage of a traditional pension is that it’s automatic: A set amount is contributed for each worker-an amount that’s supposed to guarantee a good income in retirement-and investments are managed by professionals.

The typical 401(k) is anything but automatic. Workers must decide whether to participate, how much to contribute, and which investments to choose.

While more than 80 percent of college graduates sign up for the 401(k) offered to them, only 69 percent of high school graduates do the same. Less than 61 percent of those without a high school diploma fill out the 401(k) paperwork.

College graduates are also saving more, pitching in 7.3 percent of their salaries if they’re participating in a retirement plan-still less than the 10 percent or 15 percent experts usually recommend, but more than the 5.1 percent that workers with high school degrees contribute.

That’s not necessarily surprising: By earning more, the college-educated can afford to save more. Tamborini and Kim found that if workers earn an extra 1 percent in salary, they tend to contribute an extra 1.28 percent to their retirement plans.

But the researchers also wanted to know if factors other than income are influencing how workers save. When they controlled for these factors-income, occupation, industry, company size, and years on the job-they found college graduates were still saving 26 percent more than similar high school graduates.

To explain this gap, the researchers looked at surveys that asked about savings habits and financial knowledge. Less educated workers tended to be less financially sophisticated, with less familiarity with investing and how to save for the future.

“The advantage of college education goes beyond the monetary return during the work-life,” Tamborini and Kim write. “College educated workers are taking steps to better prepare financially for retirement, even when the earnings levels are taken into account.”

As workers spend their entire careers in this system, the authors warn, the inequalities will widen between the well-educated and everyone else. The only fallback for many workers will be Social Security, which now covers 40 percent to 45 percent of the average retiree’s career earnings (and has its own fiscal challenges).

What might be done to narrow the retirement savings gap?

Financial education could help, although studies have cast doubt on the effectiveness of financial literacy programs.

Some employers have experimented with making the 401(k) more automatic-signing up all workers and setting default contribution rates and investments, while letting workers adjust them or decline to participate. (Few workers do.)

But the number of new companies introducing these automatic features is no longer rising. Vast swaths of the workforce aren’t covered by any retirement plan at all.

In response, lawmakers in a growing number of states are passing legislation to force employers without 401(k)s to sign up workers for state plans, with the goal of ensuring they can save for retirement without filling out confusing paperwork or picking their own investments.

The next state to approve such a plan could be the largest: California lawmakers could vote as early as this week to create what’s known as the Secure Choice Retirement Savings Program.

New Security Summit Video Warns Tax Pros of Cybercriminal Threats; Urges Precautionary Steps

( IRS ) August 30, 2016 – As part of the ongoing Security Summit efforts, the Internal Revenue Service released a YouTube video urging tax professionals to take the necessary steps toward guarding their data and protecting clients from identity theft.

The video featuring IRS Commissioner John Koskinen warns tax professionals that cybercriminals increasingly are targeting their offices and their data. The video spotlights the "Protect Your Clients; Protect Yourself" campaign recently launched by the Security Summit. The campaign seeks to raise awareness about cybercriminal activity and provide tax professionals the information needed to improve safeguards. A series of fact sheets and tips on security, scams and identity theft prevention measures for the tax professional community will be released throughout this summer and fall.

"The tax community handles large volumes of sensitive personal and financial information," Koskinen said. "Many tax professionals are doing their part with strong security practices. But as these threats rapidly evolve, we need every tax professional to stay on top of their security to protect taxpayers as well as their businesses.”

This new effort is an expansion of the Security Summit’s 2015 Taxes. Security. Together. campaign aimed at increasing public awareness for using security software, creating stronger passwords and avoiding phishing emails. The Summit is a joint effort between the IRS, state tax agencies and the tax preparation community to combat refund fraud and identity theft.

Fact Sheet 2016-23, “Tax Professionals: Protect Your Clients; Protect Yourself from Identity Theft,” urges preparers to follow the security recommendations found in Publication 4557, Safeguarding Taxpayer Data. The fact sheet outlines the critical steps necessary to protect taxpayer information and to build customer confidence and trust.

Security Awareness Tax Tips focusing on tax professionals also are available. The first one issued in August encouraged tax professionals to monitor their PTINs for suspicious activity.

Preparers should also sign up for e-News for Tax Professionals, the IRS Tax Pro Twitter account and the Return Preparer Office’s Facebook page to stay informed about this campaign and about scams and schemes in general. The IRS also created a “Protect Your Clients; Protect Yourself” page at http://www.irs.gov/protectyourclients.

GAO Issues Second Annual Conflict Minerals Report

( JDSupra Business Advisor ) By Cydney Posner, August 31, 2016 – The GAO has issued its annual conflict minerals report to Congress, entitled “Companies Face Continuing Challenges in Determining Whether Their Conflict Minerals Benefit Armed Groups.” The GAO is required to report annually on the effectiveness of the SEC’s conflict minerals rule in promoting peace and security in the DRC and adjoining countries (the “covered countries”) as well as on the rate of sexual violence in war-torn areas of the covered countries.

This report is particularly instructive in outlining the many challenges to supply chain due diligence arising out of fraud risk associated with reliance by processing facilities on documentary evidence from upstream stakeholders and compounded by the complexity of processing operations. If the title of report didn’t clue you in, the bottom line is that, although the GAO’s reviews “indicate some progress in companies’ efforts to comply with some key provisions of the rule, they also indicate that companies continue to face some challenges in their supply chain due diligence efforts.” For most companies, the sources of their conflict minerals remain a mystery.

The Dodd-Frank conflict minerals rule requires reporting by public companies if they manufacture or contract to manufacture products that use conflict minerals that are necessary to the functionality or production of those products. Those companies are required to conduct a “reasonable inquiry” to determine if the conflict minerals used were from a covered country.

If, based on that inquiry, the company knows or has reason to believe that the conflict minerals originated in the covered countries (or if the company learns or has reason to believe that its minerals may not be recycled or scrap), the company is required to conduct substantial due diligence on its supply chain to determine if the conflict minerals financed or benefited armed groups in the covered countries and to file a “Conflict Minerals Report” with the SEC. Under current guidance, companies that, following due diligence, state that any of their products are conflict-free will have to provide an independent private sector audit (IPSA).

The GAO report examines conflict minerals filings in 2015 (which report on activities in 2014), discusses the actions of the Department of Commerce regarding its conflict minerals-related requirements under Dodd-Frank and provides information on sexual violence in the DRC and three adjoining countries. The GAO analyzed a generalizable random sample of 100 SEC filings and interviewed relevant officials. (For a take on conflict minerals reporting in 2016 from the perspectives of two consultants, see this PubCo post.)

The GAO estimates that, as a result of conducting reasonable country-of-origin inquiries (RCOIs), 19% more companies that filed a Form SD in 2015 (as compared with 2014) reported that they knew or had reason to believe they knew the source of the conflict minerals in their products, based on the sample of filings GAO reviewed. However, 79% of SD filers performed due diligence and, of those, 67% reported they were unable to confirm the source of the conflict minerals in their products, while 97% reported that they could not determine whether the conflict minerals financed or benefited armed groups in the covered countries (the due diligence test for determining whether or not products are conflict-free).

In interviews, the GAO heard that companies experienced difficulties in obtaining sufficient information from all suppliers to enable them to determine the country of origin of all conflict minerals in their products, that some suppliers did not respond to requests for information and that some information from suppliers was incomplete (although supplier follow-ups helped mitigate that problem in some cases). Companies also indicated that, to improve their due diligence efforts, they either planned or implemented actions such as shifting operations or encouraging those in their supply chains to shift from current suppliers to certified conflict-free suppliers, including language in new supplier contracts regarding the company’s expectations relating to conflict minerals and continuing follow-up with and providing training to suppliers.

The report was especially interesting in describing some of the challenges associated with the due diligence effort:

• Processing facilities rely on paper documentation from miners and exporters for information on source and chain of custody, and ore may pass through a number of traders and exporters before reaching a processing facility. The report indicates that “documentation of these stages may be falsified by smugglers or be incomplete, which may mask the actual source of the minerals being traded, according to some experts.”

• Certification programs “face operational challenges, including lack of infrastructure and government support. OECD reported in 2013 that as long as there are no traceability or certification schemes in place that cover the whole region, smuggling and contamination of conflict-free materials will continue to pose a threat to due diligence initiatives.”

• There have also been challenges to the integrity of these programs, such as the black-market sale of tin supply-chain-initiative tags in the DRC and in Rwanda. Various organizations have “commented that the DRC government lacks capacity to mitigate corruption and smuggling of conflict minerals. The UN Group of Experts reported in 2015 that, while there has been progress on traceability and due diligence efforts concerning minerals produced in the DRC, smuggling continues, and there is scant evidence of interest in traceability and due diligence by the governments of the DRC and Burundi.”

• The complexity of processing operations exacerbates the difficulty. For example, the processing of some minerals involves “many stages and distinct intermediate products. According to USGS officials, many processors perform only some of the refining work before selling intermediate products to other processors. Therefore, according to these officials, with each additional processing stage it becomes increasingly likely that minerals will change hands, complicating due diligence efforts that depend on chain-of-custody documentation by increasing opportunities for fraud or error, such as falsified source-of-origin documentation.”

• Another issue arises out of the purchase and commingling by processing companies of products from multiple suppliers. Commingling can occur at various stages of processing, from the “primary” processing facilities, which upgrade ore concentrate into metal and may source concentrate from multiple locations, to “secondary” processing facilities, where intermediate products with different mineral locations of origin are used as the “feed material” and may be commingled, making it more difficult to identify primary processing facilities and locations of origin and potentially introducing fraud and error at multiple points in the process. The report indicates that many “primary” processing facilities, “which turn ore or concentrate into a different downstream product, produce a limited range of possible intermediate products for a given mineral. As a result, the chain of custody for each refined form of mineral used, not simply each mineral type, may need to be examined independently.” In addition, these complexities may increase the cost required for disclosure efforts or result in missing information, requiring companies to survey second- or third-tier suppliers.

• Many companies reported that some suppliers were not responsive to surveys, potentially leading to incomplete information from all suppliers earlier in the supply chain. “Without information on all companies in its supply chain, a company cannot report knowing the source of all of its conflict minerals or whether any of its conflict minerals benefited armed groups.”

But the GAO is catholic in its criticism. Downstream companies (such as manufacturers) are chastised for often failing to “rigorously scrutinize certification statements, which, if done, might boost the credibility of due diligence efforts.”

Moreover, the GAO reports, various officials complained that “downstream companies also do not shoulder much of the auditing cost burden placed on upstream companies, which may be reducing participation,” while “upstream companies and certification initiatives have struggled with the significant cost of conflict minerals traceability programs and voiced their concerns about downstream companies not sharing the burden sufficiently while benefiting from those programs.”

The GAO also pointed its finger at the Commerce Department. Although the report commended Commerce for producing lists of known conflict minerals processing facilities worldwide in 2014 and 2015 as required under Dodd-Frank, in 2015, Commerce used USGS data to create the list — even though the USGS uses a different definition for “processing facility” than does the SEC, OECD and the Conflict-Free Sourcing Initiative (CFSI), with the USGS apparently focusing on “primary” processing facilities to the exclusion of “secondary” facilities.

That difference could dramatically affect the utility of the Commerce lists for reporting companies. Moreover, as of July 2016, Commerce had not performed an assessment of the accuracy of IPSAs or provided any recommendations for improving the accuracy of IPSAs, as required under Dodd-Frank. Commerce officials admitted that they didn’t know the first thing about IPSAs — well actually, the report said that they “stated that Commerce did not yet have the internal knowledge or skills to conduct reviews of IPSAs or to establish best practices.” However, Commerce is now doing outreach to the audit community and getting a team together. Given that only six IPSAs were filed in 2015, there may not be much to assess.

However, industry efforts are continuing to make some progress. According to the GAO, industry organizations are encouraging the participation of processing facilities in conflict-free certification programs, attempting to standardize the audit process and working to better align their programs with OECD’s due diligence guidance. As of April 2016, the GAO reports that the CFSI had gathered information on 332 processing facilities (of which 214, or about 64%, were compliant with CFSI standards).

Some companies are actively encouraging suppliers to participate in these programs. In addition, industry participants are developing new technologies, such as “chemical fingerprinting,” which is designed to combat the risk of documentation fraud by allowing minerals to be traced to a location of origin based on distinct chemical signatures. But even these certification programs do not emerge unscathed: GAO reports that industry certification programs have been criticized for engaging in inefficient and redundant auditing, increasing compliance costs.

How to Mitigate the Threat of Ransomware

( CFO ) By Michael R. Overly, Aaron Tantleff August 31, 2016 – All too often, companies’ focus after being victimized by a ransomware attack is on the ransom paid, which is generally the most trivial outcome of the incident. From the perspective of a CFO, what goes unaccounted for in any meaningful way is the lost productivity, lost profits, harm to business reputation, cost of reconstructing data, and other damages that flow from these attacks.

While state and federal laws may require breaches of privacy to be reported, that’s not the case with ransomware attacks. As such, a significant number go completely unreported and unpublicized, so the true extent of the damages caused remains a mystery. In some cases the ransomware attack is just one prong in a multi-pronged attack on an organization’s infrastructure, making it almost impossible for even the victim company to determine the specific impact of the ransomware.

So, in short, CFOs are struggling to understand the financial impact of these attacks. To help them better understand, and to mitigate the impact, this article discuss the types of harm and damages and makes specific recommendations for better controlling security risks, including the use of cyber-liability insurance.

Types of Damages and Harm

Ransomware typically targets an organization’s most valued information. But it could reach almost any information, including marketing materials, payroll data, intellectual property, financial transactions, and health records.

Hiring an expert who is able to decrypt the information is often more expensive and time-consuming than paying the ransom to get the information restored. And sometimes data restored by a recovery service is incomplete, with full recovery requiring the decryption key. However, by the time an organization discovers that the recovery is incomplete, the attacker likely has already destroyed the key and moved on, making full recovery an impossibility.

If the ransomware hits certain servers, it may be distributed throughout an organization to all users and potentially to third-party users connecting to those servers or other infected user devices. It can also infect the organization’s backup media, meaning that if the target tries to restore data from its backups, it could re-infect its systems and data.

These attacks can take hostage and threaten to or actually disclose confidential or proprietary information to the public or, even worse, the highest bidder. The fear of such disclosure a motivating factor for victims and gives them little time to think rationally about their options.

Controlling Risk

An overall approach to addressing the threat of ransomware could include the following practices:

• Train and educate personnel on an ongoing basis.

• Specifically address and plan for ransomware in the business’ disaster recovery and business continuity plans, including testing of those plans.

• Ensure that all anti-virus and other security software is properly updated. Many forms of ransomware can be detected and avoided using this simple step.

• Engage a third-party expert security vendor to assess your organization’s systems and procedures.

• In the event of an attack:

Insurance as a Path to Mitigation

CFOs have traditionally looked to insurance as a key means of mitigating risk. In the security context, a wide range of cyber-liability policies are now readily available.

Cyber insurance policies are an important tool for CFOs in managing the impacts of cyber and other information-breach incidents. Some policies include the payment of a ransom, while others expressly exclude it due to the “moral hazard” of such coverage. Where such policies do exist, many are limited and may have coverage exclusions.

For organizations that have such policies, working with the broker and insurers to understand the policy and the procedures for filing a claim is crucial to payment under the policy. Often the policies are tightly drafted to mitigate the impact of cyber fraud and require the policyholder to educate its workforce and implement appropriate means, such as business continuity and disaster recovery procedures, to prevent the ransomware intrusion and mitigate the impacts of an incident.

Conclusion

Unfortunately, incidents of ransomware are increasing daily and there appears to be no end in sight. With every payment to an attacker, we only embolden and incentivize attackers to continue and encourage others to join the ransomware community. Presently, there is no panacea for preventing these attacks. No one is immune.

Given the difficulty of preventing ransomware infection, companies should focus on personnel training and awareness, which has one of the best returns on investment in preventing these attacks. Following closely behind training in effectiveness is the deployment and testing of business continuity and data backup procedures designed with attacks like ransomware in mind.

GASB Proposes Guidance for Debt that is Extinguished Early Using Only Existing Resources

( GASB ) August 29, 2016 – The Governmental Accounting Standards Board (GASB) proposed guidance that state and local governments would apply when extinguishing debt prior to its maturity. Specifically, the Exposure Draft, Certain Debt Extinguishment Issues, (view press release) proposes guidance for transactions in which only existing resources are placed in a trust for the purpose of extinguishing debt.

Current GASB standards provide guidance on how to account for and report when the proceeds of refunding bonds are placed in a trust for the future repayment of outstanding debt. However, the standards do not apply when only existing resources (in other words, other than bond proceeds) are placed in a trust for the future repayment of outstanding debt. Consequently, governments could account for what is essentially the same transaction in two different ways.

The Exposure Draft proposes uniform accounting and financial reporting guidance for debt that is “defeased in substance,” regardless of the source of the resources that are placed in a trust.

“Whether you borrow the money to extinguish the debt or use cash you already have, the treatment ought to be the same because the economic substance of the transaction is the same,” said GASB Chair David A. Vaudt. “From a government’s perspective, the source of the money that is being used to refund debt should not matter as long as the requirements for in-substance defeasance are met.”

In this context, in-substance defeasance refers to a situation in which the debt remains outstanding but sufficient resources—in the form of essentially risk-free monetary assets—have been placed into an irrevocable trust to make payments on the debt when they come due. When debt is defeased in substance, the debt and the resources placed in trust are no longer reported in the financial statements. Governments are required, however, to disclose information in the notes to the financial statements about debt that has been defeased in substance.

The Exposure Draft also proposes guidance relating to prepaid insurance on debt that is extinguished and notes to the financial statements for certain defeased debt. One proposal would require disclosure if a government is not prohibited from subsequently exchanging the essentially risk-free monetary assets in the trust with monetary assets that are not essentially risk-free.

The Exposure Draft is available on the GASB website, www.gasb.org. Stakeholders are encouraged to review and provide comments by October 28, 2016.

How to Tackle the 5 Biggest Intercompany Accounting Challenges

( CGMA ) August 26, 2016 – Businesses of any size can encounter intercompany accounting challenges. Additional challenges arise during global expansions, as the supply chain becomes more complex, or when the entity has gone through a merger or acquisition.

Intercompany accounting can be difficult because it deals with money that flows across multiple legal entities of a company. A 2016 Deloitte poll of more than 3,800 accounting and finance professionals suggests that disparate software systems in the different legal entities pose the biggest problem (21.4% of respondents), followed by intercompany settlement (16.8%), complex intercompany agreements (16.7%), transfer-pricing compliance (13.3%), and foreign exchange exposure (9.4%).

Growth through acquisition is a key strategy at TrueBlue, an on-demand staffing and professional recruitment company based in Tacoma, Washington. In the past two years, the publicly traded company has increased annual revenue 61.5% to about $2.7 billion through acquisitions that expanded its business geographically and added services, according to filings with the U.S. Securities and Exchange Commission.

Consolidation is underway, but for now the rapid growth has left in its wake multiple subdivisions using different enterprise resource planning (ERP) software and point-of-sale systems, said Shana Kneib, CPA, CGMA, associate accounting manager at TrueBlue. Many of the processes are manual because they haven’t been scaled yet.

“Disparate software systems are definitely a challenge,” Kneib said. “If you have a lot of manual processes, then you run the risk that things don’t get recorded properly.”

To avoid problems, communication in any form – email, teleconferences, meetings, and phone calls – is key, she said. During the week TrueBlue goes through the monthly close, and each day, finance staff at corporate headquarters assembles for a 15-minute standup to discuss issues and holds a teleconference with colleagues in Chicago, who manage part of the business.

“If you don’t have consistent systems, you have to communicate really well to understand and meet deadlines,” Kneib said.

Deloitte suggested that collaboration among accounting, tax, and treasury can also make it easier to tackle the challenges, especially when the legal entities involved in intercompany accounting follow a framework of standardized global policies that govern critical areas across the business.

A minority of the participants in the Deloitte survey said their companies follow such a holistic approach. More than two-thirds of respondents said an intercompany accounting framework was a goal they were working towards, but only 9.2% said it was in place. Accounting, tax, and treasury had combined efforts to manage intercompany accounting at the businesses of about one-quarter of respondents. The majority of respondents (55.7%) said accounting had taken the lead.

To tackle intercompany accounting challenges, Deloitte recommended these best practices:

• Standardize global policies that govern critical areas across the organization. Critical areas that standardized global policies should address include data management, transfer pricing, foreign exchange and currency, and netting and settlement.

• Establish a center of excellence. Cross-functional involvement of tax, finance, IT, and treasury experts is key.

• Set up a master data management program to execute standardized global policies. Integration of multiple ERP systems ensures that new and acquired accounts are set up in alignment with policies and that intercompany transactions are processed in a standardized way.

• Define a cash management strategy to net and settle transactions. Having a cash management strategy in place reduces bank fees and the amount of cash sitting in accounts not bearing interest, and it provides information that allows the company to hedge currencies.

• Use a third-party reconciliation software tool that matches transactions. To reconcile transactions across multiple ERP systems, companies should use software that can match transactions from one legal entity to another and can identify a single transaction when a problem pops up.

Post-Implementation Review Concludes GASB’s Pollution Remediation Statement Achieves Purpose

( Accounting Foundation ) August 23, 2016 – A Post-Implementation Review (PIR) of Governmental Accounting Standards Board (GASB) Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations (issued 2006), concluded that Statement 49 accomplished its objectives of providing more consistent, timely, and complete reporting of pollution remediation obligations by state and local governments.

“The PIR report on Statement 49 tells us that, overall, the standard provides creditors and other users of financial statements with useful information,” said GASB Chair David A. Vaudt. “The GASB acknowledges the issues raised by some governments in applying certain provisions of the Statement, and will consider those issues when addressing the provisions in the future.”

The PIR team developed its final report based on input from financial statement users, preparers, and auditors. The Statement 49 PIR team reached the following overall conclusions:

• Statement 49 resolved the primary issues underlying its stated need. In particular, it achieved the objective of reporting pollution remediation obligations that is more consistent, timely, and complete.

• Statement 49 provides creditors and other users of financial statements with useful information. Users of financial statements incorporate information about pollution remediation liabilities in their analyses when pollution remediation obligation amounts are significant. For most governments, however, pollution remediation obligation amounts are not significant.

• Statement 49 is operational because it is understandable, can be applied as intended, and enables information about pollution remediation obligations to be reported reliably. The measurement of a pollution remediation liability requires judgment as with any other accounting estimate.

• The changes made to financial and operating practices as a result of Statement 49 are not significant or unexpected.

• There were no significant unanticipated consequences as a result of the adoption of Statement 49.

• Overall, implementation and ongoing application costs associated with Statement 49 were not significant and were consistent with the GASB’s expectations.

• Statement 49 achieved its expected benefits.

The PIR team had no standard-setting process recommendations as a result of the review.

The review of Statement 49 was undertaken by an independent team of the Financial Accounting Foundation (FAF), the parent organization of the GASB and the Financial Accounting Standards Board (FASB). The team’s formal report is available here. The GASB’s response letter to the report is available on the GASB website.

With the completion of the GASB Statement 49 review, the PIR team has begun its review of GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. For more information on the PIR process and to express an interest in participating in a review, visit the FAF website.