Author: Christina Lane

The SEC on Dec. 10 decided that two EY partners and one principal didn’t take the auditor independence rules seriously and doled out a few fines and sanctions. And like many of these auditor independence violations that get firms in hot water with the SEC or the PCAOB, the flagrant rules bending by EY had to do with providing non-audit services to an audit client. In this particular instance, the audit client was Cintas Corp:

This matter involves aiding and abetting and causing violations of the auditor independence rules arising from Ernst & Young LLP (“EY”), a public accounting firm, performing non-audit services for its audit client Cintas Corporation (“Cintas”) on a contingent fee basis.

EY billed and received payment from Cintas on invoices calculated on a contingent fee basis for tax credit and incentive services (“C&I services”) performed between July 2009 and August 2018. An audit firm is not independent of its audit client if it provides any non-audit services to the audit client for a contingent fee. As a result, EY was not independent of Cintas during that time period, and Cintas filed annual and quarterly reports with the Commission that were not audited or reviewed by an independent public accountant, as required by Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder.

Philip Hurak

During that time period, Philip Hurak, Alan Greenwell, and Adam Bering also blissfully ignored Rule 2-01(c)(5) of Regulation S-X which says “[a]n accountant is not independent if, at any point during the audit and professional engagement period, the accountant provides any service or product to an audit client for a contingent fee … or receives a contingent fee … from an audit client.” The SEC also found out that EY’s policies and procedures also prohibited billing audit clients on a contingent fee basis.

As Cintas’s auditor, EY had to obtain pre-approval from the company’s audit committee in order to provide non-audit tax services to Cintas, according to the SEC administrative order. In obtaining pre-approval from the audit committee to provide those services, EY said it would bill for C&I services on a time and materials basis. The audit committee gave its blessing.

But …

Despite EY’s … representations that EY would perform C&I services for Cintas on a time and materials basis, in fact EY improperly billed Cintas for C&I services based on a percentage of the relevant tax credit or incentive secured. Specifically, from July 2009 through August 2018, EY charged, and Cintas paid, fees of approximately—sometimes exactly—10% of the benefit Cintas received for federal tax credits and 15% of the benefit Cintas received for state and local tax credits resulting from EY’s C&I engagements.

For example, from 2009 through 2018, EY assisted Cintas in obtaining certain federal tax credits related to hiring. Initially, EY billed Cintas for this work annually at exactly 10% of the credits Cintas obtained. In later years, EY billed Cintas for this work on a quarterly basis and reconciled the bills at the end of the year so that EY’s annual fees were approximately 10% of the total credits Cintas obtained for that year. Certain EY bills to Cintas summarized the amount of each credit and then stated the applicable charges. It was clear on the face of the invoices that the charges were 10% of the amount of the tax credits.

During that time period, Greenwell, who was the tax account leader for tax services EY provided to Cintas, including C&I services, failed to investigate red flags indicating that EY was billing Cintas on a contingent fee basis for C&I services, according to the SEC.

For example, in February 2016, Respondent received an email from Cintas indicating that, for 2014 and 2015, EY had billed Cintas estimated amounts for federal tax credit work and that a reconciliation would occur once the precise amount of the federal tax credits was known. The email suggested that the final fee would be contingent on the amount of credit Cintas received for the work, which Respondent failed to investigate.

Similarly, in March 2017, Respondent was copied on several emails regarding an EY invoice to Cintas for certain state tax credits. In the emails, EY managers told Cintas that the final invoice would be calculated and sent to the company once Cintas had secured the expected incentives. This suggested that EY’s fees would depend upon the final amount of the tax credits, and Respondent again failed to investigate.

During the relevant period, Respondent completed audit work papers certifying that EY complied with applicable auditor independence requirements. Respondent also verbally told Cintas’s audit committee that there were no issues that impacted EY’s independence. As described above, EY was not independent of Cintas. Respondent failed to investigate red flags indicating that EY was performing certain C&I services for Cintas on a contingent fee basis, which violated the auditor independence rules.

Hurak, who was an engagement manager for certain C&I services that EY provided to Cintas from April 2013 to August 2018, reviewed and approved certain EY invoices sent to Cintas for C&I services, including those services provided to Cintas on a contingent fee basis.

For example, in November 2016, Respondent approved billing Cintas for obtaining a large federal hiring-related tax credit. The invoice listed both the amount of the credit and the amount of the fee. The amount of the bill was almost exactly 10% of the credit amount that Cintas received. Cintas paid the invoice in January 2017.

Similarly, in September 2017, Respondent emailed Cintas an invoice for C&I services relating to three federal tax credits. The email also summarized the amount of each federal credit and the charges for each credit. Those charges were approximately 10% of the tax benefit Cintas received for each credit. Cintas paid the invoice in October 2017.

Bering, who was the engagement partner for C&I services that EY provided to Cintas from July 2009 through June 2018, failed to perform a reasonable inquiry in response to information that EY staff under his supervision were billing Cintas for C&I services on a contingent fee basis, according to the SEC.

By at least 2016, Respondent became aware of information that EY staff under his supervision were billing Cintas for C&I services on a contingent fee basis. In March 2016, in response to questions he raised to EY staff about Cintas invoices, an EY manager emailed Respondent that “[h]istorically [Cintas] has agreed to pay us fees that reflect the amount of benefit we bring.” In that same email, the EY manager included a chart showing Cintas’s tax credits and EY’s corresponding fees, which were a percentage of the tax credits. Respondent failed to investigate the information in the email suggesting that a contingent fee arrangement existed between EY and Cintas.

In January 2017, Respondent did not respond to an email from an EY manager specifically raising concerns that EY had been invoicing Cintas on a contingent fee basis for C&I services. When the manager followed up during a phone call, Respondent directed the manager to discuss the issue with the person responsible for invoicing Cintas and otherwise failed to perform a reasonable inquiry as to the manager’s concerns.

Alan Greenwell

Hurak, an attorney licensed in the state of Ohio who became an EY principal on July 1, 2018 before resigning from the firm in February 2019, agreed to pay a $20,000 fine and to cease and desist from future violations of auditor independence rules. He is also suspended from appearing or practicing before the SEC as an attorney for two years. He is currently a shareholder with accounting and advisory firm Clark Schaefer Hackett, according to his LinkedIn profile.

Greenwell, a partner throughout the relevant time period who left the firm involuntarily in March 2019, agreed to pay a $15,000 fine and to cease and desist from future violations. In addition, he is barred from appearing or practicing before the SEC as an accountant for two years. Greenwell currently is a shareholder and Cincinnati markets leader at tax and accounting firm Brixey & Meyer, according to his LinkedIn profile.

Adam Bering

Bering, an attorney licensed in the state of Ohio and current principal at EY, agreed to pay a $10,000 fine and to cease and desist from future violations. He also is suspended from appearing or practicing before the SEC as an attorney for one year.

In addition, Scott Clark, an accountant and former vice president of corporate taxation for Cintas, had his wrist slapped by the SEC for negotiating and approving payment of EY’s contingent fee invoices on Cintas’s behalf. He was fined $30,000 and agreed to cease and desist from future violations. Clark was also suspended from appearing or practicing before the SEC as an accountant for one year.

Related article:

EY Learns the Hard Way Not to Screw Around with the SEC’s Auditor Independence Rules

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Irrespective of your feelings on the matter, crypto could very well prove that it is here to stay.

There’s little doubt that cryptocurrency represents one wave of the future. Bitcoin and Blockchain have changed the way we see traditional paper-based money and metallic coinage. Savvy investors are getting in “on the bottom floor,” as the saying goes. Virtual currencies don’t need to feel like a gamble or a fade. Irrespective of your feelings on the matter, crypto could very well prove that it is here to stay. All kinds of cash – even the offline ones – go through cycles of boom and bust. Inflation can change everything, and so can fluctuating tax codes. What is the IRS looking for, and how can you avoid running afoul of their regulatory agents? 

Closer Look at Cryptocurrency Itself 

According to federal tax rules, cryptocurrency is classified as property and not a financial asset. By the IRS’ reckoning, it is a capital asset as well. So the gains and revenue you generate from selling or trading capital assets are indeed taxable. Other types of capital gains are stocks, bonds, houses, and widgets. Recent investment innovations such as Dogecoin and Bitcoin also fall under this category. So if your income is higher than your baseline, you receive a capital gain. Conversely, if you end up losing money, that is clearly a capital loss. 

Gains Help Diminish the Associated Taxes

Taxes are a certainty in life. However, taxes have been collected throughout human history via various foodstuff resources such as wheat and rice. Reducing your tax bill takes some careful planning and plenty of patience. Keep your short-term gains until they convert into long-term gains instead. This process should take about a year, so you will be richly rewarded if you can resist the urge to sell. 

Wager Gains and Losses Against Each Other 

Investments come with some inherent risks. They might not work out the way you wanted. Even so, be bold enough to pit prospective gains against potential losses. Subtract your crypto losses from the gains you made—additionally, factor value appreciation into your calculations. Please be advised that you’ll inevitably run into strict limits if you play it this way.  

Capitalize on The Seller’s Market

Low-income years are perfectly normal. Despite the loss of revenue, your small business (or S-Corporation as well) can still stay afloat. Selling at the right time decreases the amount of taxes you have to pay. This scenario benefits you the most after you’ve retired because you won’t be bumped into a higher tax bracket. 

Trust the Professionals at the Harding Group

Unlike other accounting firms, The Harding Group, located in Annapolis, MD, will never charge you for consultations and strive for open communication with our clients. 

Are you interested in business advising, tax preparation, bookkeeping and accounting, payroll services, training + support for QuickBooks, or retirement planning?  We have the necessary expertise and years of proven results to help. 

We gladly serve clients in Annapolis, Anne Arundel County, Baltimore, Severna Park, and Columbia. If you are ready to take the stress out of tax time, contact us online or give us a call at (410) 573-9991 for a free consultation. For more tax tips, follow us on FacebookTwitterYouTube, and LinkedIn

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Is accounting an obsolete major? That’s the question posed by John “Jack” Castonguay, PhD, CPA, in the August/September 2021 CPA Journal. He writes:

Accounting — at least as an independent field of study — is becoming obsolete in today’s technology- and analytics-focused world. Its value lies in its interdisciplinary applicability and position as a foundational business curriculum. In recognition of that reality — and to maintain a pipeline of candidates open to CPA licensure, increase the number of engaged accounting students, and keep the profession relevant to the next generation — this author believes that colleges and universities should eliminate the accounting department as a stand-alone department and reorganize accounting under finance and information systems departments.

It’s long been established — and we here at Going Concern have nearly 13 years of evidence littered throughout our archives to prove it — that the accounting profession has a recruitment problem. A decade ago, the profession’s efforts were honed in on increasing diversity, but nowadays it’s about getting people in the door.

The most recent AICPA Trends report [PDF] — published in 2019 — tells us that accounting enrollments are down overall, though it does look like there’s some positive movement on the diversity side:

Total projected accounting enrollments are down 4% from the highs of 2016, but are still among the highest on record. Master’s enrollments are down 6% from 2016. Racial/ethnic diversity has increased in the 2017-18 academic year. Universities have reported increases in Hispanic or Latino enrollees of 3 and 8 percentage points at the bachelor’s and master’s levels, respectively. Seventy-two percent of bachelor’s of accounting programs and 65% of master’s of accounting programs expect to have the same or higher enrollment in 2019.

We are anxiously awaiting the newest AICPA Trends report, which is published every two years and therefore should show up anyday now. Until then, we can only guess on what the next batch of numbers will look like and hand-wring over the data we do have.

The Bureau of Labor Statistics forecast employment of accountants and auditors to grow 13.1% from 2012 to 2022; current BLS data projects 7% growth for this segment from 2020 to 2030, about as fast as the average for all occupations.

About 135,000 openings for accountants and auditors are projected each year, on average, over the decade. Many of those openings are expected to result from the need to replace workers who transfer to different occupations or exit the labor force, such as to retire.

Let’s talk about retirements while we’re on the topic. A few years back, the AICPA estimated that a whopping 75% of its members (read: CPAs) would be eligible for retirement in 2020. When you combine this figure with waning interest in accounting as a major, more and more accounting graduates foregoing the CPA exam, an accounting professor shortage, and the pressures of a traditionally reactionary profession to take proactive steps to adapt to new technology, well, it doesn’t look pretty.

The CPA Evolution project aims to address that last issue, and the AICPA and NASBA recently released a revised CPA Evolution Model Curriculum upon which university accounting programs can build their curricula but are by no means required to. I’m hearing grumblings from deep within the bowels of academia that some professors are less than thrilled about this project, but no one is willing to go on record, so if you’re an accounting professor with an opinion on CPA Evolution good or bad and willing to put your name on it, please do reach out.

The problem with this approach, writes Castonguay, is that the new curriculum fails to address the “jack-of-all-trades” problem; early-career accountants in particular are expected to know a little bit about a lot of stuff, essentially.

Even though the CPA Evolution Project is aligning the credential with practice, it is also underscoring that the value in the license lays not within the accounting curriculum that has existed for decades; the new value is the technology, the analytics, the systems, and the tax research. But I believe the curriculum realignment anticipated by the CPA Evolution Project will only lead to an even faster decline in enrollments if accounting remains siloed as a stand-alone major.

As the profession gets more specialized, the accounting curriculum is expanding to include more information, more courses, more skills, and more tracks—but students are less skilled at each one. It’s a cycle that can’t be fixed by repackaging existing courses. It can only be fixed by eliminating the accounting major and unlocking accounting’s interdisciplinary value and specialization within finance, information systems, or other departments.

In order to better recruit future accountants (or should we start calling them accounting analysts?), Castonguay suggests a total rehaul of accounting education, rolling existing accounting curriculum into other departments. This, he says, is preferable to trying to cram technology content into existing accounting programs instead, which seems to be the current plan.

[T]he accounting department itself should be eliminated and reorganized predominately under finance and information systems departments. In the author’s opinion, this approach will unlock the value in the fast-evolving accounting roles that accounting firms and future employers seek from graduating students.

So what do we think? Is accounting a dead major? Is the solution to the profession’s pipeline problem as easy as parasitically latching onto other business majors hoping to snag a couple future CPAs with the captivating glitter of accounting fundamentals?

I’ll say this: the next few years are going to be very, very interesting.

Photo by Ana Arantes from Pexels

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