Having mastered all of its other responsibilities, the IRS was getting restless. Seeking a new challenge, they are now going to run a testing and continuing education bureaucracy for unenrolled preparers.
When a bureaucracy takes on a new role, the smart question to ask is: who wins?
The big franchised tax preparers are the biggest winners &R Block, Jackson Hewitt and Liberty Tax will now get to put little neon signs saying “IRS Licensed” in their windows. Yes, they will have to take on some responsibility in administering continuing education and employee testing, but they will be able to spread that cost across a nationwide business. They will find ways to streamline things so their employees will miraculously achieve government-approved competence with amazingly little effort. And they will be able to afford fixers and lobbyists to unravel any glitches that happen in the IRS preparer bureau.
This process isn’t just hypothetical. It is just another variation of what happened in the accounting industry after Sarbanes-Oxley and PCAOB. Smaller firms who would take on small public companies before PCAOB could no longer justify the regulatory costs, and the public companies are now captive clients of the big firms.
Over time, the IRS regulatory function will undergo the inevitable process of regulatory capture by the big players. The result – regulations that don’t much bother them but which make life difficult or impossible for their little competitors.
Fixers and lobbyists – See above.
Congresscritters and their staffs – Especially those on tax writing committees. Their new friends Henry, Robert, Jackson and Hewitt will enrich their PACs and make sure that the needs of their new overlords are attended to.
IRS staffers – Once public service palls, the bureaucrats who oversee the programs will have cushy new homes awaiting them at the franchised tax shops.
When there are winners, there are losers. These include:
Small tax prep shops – A solo practitioner will have to manage the new bureaucracy alone, while his giant competitors will have full-time fixers. When a little guy’s competency exam gets lost by the IRS bureaucracy, he might lose a season’s worth of business; fixers and lobbyists will make sure nothing like that happens to the big boys. And of course the inevitable capture of the IRS bureaucracy by the big players will continue to squeeze the little guys.
Enrolled Agents – Now that the IRS will be creating a new lesser level of licensing, these professionals will have a harder time distinguishing their much higher standards to a confused public.
Consumers – The most obvious result will be an increase in prices, both to pay for the new compliance costs and because the rules will run smaller preparers out of the market. Supporters of the regulations will say that it will be worth it because the new standards will improve quality. That’s a pipe dream. A bozo test and a few hours of CPE won’t turn a quack into a brain surgeon.
Low income consumers will, of course, not have to pay for the fancy “licensed” preparers. There will still be plenty of folks with pirated copies of Turbotax preparing unsigned returns in their cars and apartments, and the higher prices of the licensed competitors will send them more business. Other consumers will either struggle through their own returns without benefit of CPE or drop out of the tax system entirely.
So what would be a better approach? – The real problem is Congress. A simple tax law without fraud-inviting refundable credits wouldn’t have preparer problems. At the very least, we should require Congresscritters to face the consequences of their own work. Every one of them should be required to prepare their returns themselves in a live (and archived) webcast. If they use software, their screens should be visible on the webcast. What about their privacy? They make us give them all of our personal information, so fair is fair.
Editor’s note: Joe Kristan is a tax shareholder for Roth & Company, a Des Moines, Iowa CPA firm, where he works with closely-held businesses and their owners. Prior to helping start Roth & Company, he worked for two of what are now the Final Four CPA firms. He writes the Tax Update Blog and is available for seminars, first communions, Bar Mitzvahs, etc. You can see his debut post for GC here.
A little afterthought on Carlo di Florio’s new gig as the director of the Office of Compliance and Inspections and Examinations (“OCIE”). And no, we’re not caving to the request of some to go ape over the revolving door that is every financial regulatory agency.
Our thought is this man has absolutely no pressure heading into his new job. None. Look at the track record of his predecessor:
Lori Richards, who had headed OCIE since its creation in 1995, left the SEC last August. She was one of several high-level officials, including the enforcement director, who departed the agency after Schapiro took the helm in January 2009.
Kotz has detailed how the SEC bungled five investigations of Madoff’s brokerage business between June 1992 and December 2008, when the financier confessed to his sons that he was operating a fraudulent scheme. Top SEC officials have pledged to fix the problems and said they have made major changes.
So essentially he’s following 13 years of utter incompetence.
Plus, according to the Commission, Carlo was a dynamo at P. Dubs helping them build their “corporate governance, risk management and regulatory compliance practice[s]” and was a top dog for “[investigating] corporate fraud, corruption, conflicts of interest and money laundering.” So if he’s the jim-dandy they say he is, he’ll be finding fraud in his sleep. The SEC is in total rebuilding mode and he’s following over a decade of failure so is there anything he could possibly do to screw this up? A few decent busts a year and this guy will go down in history like Eliot Ness.
Well played, Carlo. Well played indeed.
Head of SEC Inspections Office Named [AP via NYT]
Bob Herz must be feeling a little blue now that his buddy Tweeds announced that he is hanging up his eyeshade.
This melancholic state has apparently led Herz to the conclusion that it’ll be okay to let banking regulators “use their own judgment” when it comes to letting banks stray from almighty GAAP:
“Handcuffing regula orting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation,” Mr. Herz said in the prepared text.
“Regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system,” he added. “And, conversely, in instances in which the needs of regulators deviate from the informational requirements of investors, the reporting to investors should not be subordinated to the needs of regulators. To do so could degrade the financial information available to investors and reduce public trust and confidence in the capital markets.”
Mr. Herz said that Congress, after the savings and loan crisis, had required bank regulators in 1991 to use GAAP as the basis for capital rules, but said the regulators could depart from such rules.
Herz is calling it “decoupling” of the rules which sounds a hell of a lot like “the rules are the rules only when they don’t work out so well for banks.” Not sure about anyone else but it sounds like Herz is caving to political pressure after insisting that everyone butt out.
Because if we read that correctly, any time banking regulators are feeling sketchy about the market’s ability to put value on the banks’ assets, they’ll just call a time out on fair value with no ringing up the FASB, auditors, or anybody else to get a permission slip?
Will banking regulators even know when the market is being irrational? If you were to ask JDA, she’d probably say, “No fucking way.”
A less irreverent but similar point of view from Daniel Indiviglio at the Atlantic:
I worry that if regulators are provided this flexibility, then they will always suspend mark-to-market accounting when a crisis hits. But in cases where the market permanently corrects the value of assets downward, their values would remain elevated in the regulators’ eyes. Then, once the crisis appears to improve, banks will eventually cause a sort of secondary crisis when they are forced to begin realizing the decline in the value of those assets.
Moreover, I worry about how investors will react to this change. Imagine you’re an investor. A crisis hits, and regulators step in to suspend mark-to-market accounting for a bank you own equity in. Are you worried? I sure would be — regulators were so concerned about the bank’s assets that they felt forced to suspend mark-to-market accounting! As an investor, I’ll still do my own math to figure out what I think the bank’s assets are worth. So investors might dump the stock anyway, endangering the value of the institution despite this move by regulators.
So it’s fair value unless we’re in a potential shit + fan situation. In the off-chance that the regulators recognize the impending disaster, they’ll tell the banks to forget fair value for now. Then once everything is hunky dory, we go back to fair value. Whatever, we’re over it.
Board to Propose More Flexible Accounting Rules for Banks [Floyd Norris/NYT]
Should Regulators Be Able To Suspend Accounting Rules? [The Atlantic]
Also see: Decouple US accounting rules, bank regulation-FASB [Reuters]
The public understanding of what auditors actually do is, to put it mildly, frustrating. If you were ask the average dude on the street what auditors’ responsibilities were, “Find fraud” would probably be the first thing that you would hear.
With all the public outrage against everything remotely related to finance or accounting, politicians feel like they have to do something. This usually amounts to putting pressure on bureaucrats, who in turn make rules to appease said politicians who can then point to accomplishments.
The PCAOB is no exception, and regardless of its potential extinction, has a go-getter attitude that includes potentially making the public’s perception more of a reality.
FEI Financial Reporting Blog:
Although not part of the PCAOB’s formal standard-setting agenda for the upcoming year, some SAG members argued there was a need for the PCAOB to revisit the fundamental fraud standard (SAS 99) as a standalone or ‘foundational’ standard, in much the same way as the PCAOB is in the process of re-proposing its suite of risk assessment standards as ‘foundational’ standards.
You probably know where this is going:
In response to questions, Silvers said, “We should not expect that every audit is a forensic audit… that’s absolutely not what I’m saying.” However, he added, “I think we need to move the dial a little bit so auditors have some greater obligation than is currently embodied in the current fraud standard, to have an obligation to act when there is reasonable suspicion of fraud.”
“This was subject to some extensive discussion in the Treasury committee (Treasury’s Advisory Committee on the Auditing Profession or ACAP],” said Silvers, adding, “some people, Lynn [Turner], may feel my approach is not tough enough, some people felt we should move to some absolute liability standard [i.e.] if you don’t find fraud, it’s the auditors fault; but it’s also not my view that looking for fraud is not related to the audit, that doesn’t parse with the public’s [perception] of the audit profession.”
Our emphasis. So not every audit will be a forensic audit, so, just most of them? That’s a relief.
So not only do you need to get way better at auditing fair value, now the brain trust at the PCAOB is considering putting more auditor flesh on the hook when it comes to finding fraud. So not absolute assurance but it’s getting there.
PCAOB Announces Ambitious Agenda; May Be Time to ‘Dial Up’ on Fraud, Silvers Says [FEI Financial Reporting Blog]
Finally someone has had enough of the SEC’s new-sheriff-in-town act and is suing their asses for missing Bernie Madoff’s not so subtle Ponzi scheme.
Two victims are suing the House of Schape for their money that just up and disappeared, which amounts to $2.4 million. The suit also serves as a friendly reminder for the Commission that they sucked at their jobs big time for the better part of a decade.
According to the suit, the two victims, Phyllis Molchatsky and Steven Schneider, initially tried playing nice by filing administrative claims with the SEC but the Commission told them to get bent, thus allowing Molcahtsky and Schneider to sue in Federal court.
This may result in other Madoff victims filing suit as well, so our advice to M. Schape would be to call over to the Fed and to see if she can borrow that money printing machine.
Two Madoff victims file lawsuit against the SEC [Reuters]
See also: Madoff Victims Devise Hedging Strategy [DB]
That’s right! Schape and Co. are coming heavy this time bitch. They don’t know who you think you are, Mark Cuban, but you think you can just walk away from avoiding negligible losses to your net worth and get away with it? OH HELL NO.
The Commission is going to continue pursuing your alleged insider trading ass even though they haven’t been able to present a shred of evidence that you promised to sell those shares. No matter, they’ll pull something together.
Oh, and another thing Mr. Man-Child, the Commission won’t be paying your attorney fees. They realize you’re suing out of spite and regardless their hard-on for billionaires in their 50s that wear basketball jerseys, they won’t stand for it.
S.E.C. to Appeal Court Ruling on Mark Cuban [DealBook]
God bless the PCAOB. Back in 2004, they created the Office of Internal Oversight and Performance Assurance (IOPA) just in case those smartass Peekaboo inspectors were getting a little too self-righteous all over your audit.
Apparently, the fact that the PCAOB has its own internal oversight board is supposed to make all of you auditors comfortable. That assumes you knew about it in the first place. We sure didn’t know this internal affairs-esque board-within-a-board existed.
Maybe realizing that the IOPA had virtually no identity among anyone, anywhere, the PCAOB did everyone the courtesy of updating its “About” section of its website today reminding us of the internal watchdog. So whether you’ve got a legitimate complaint or you’re just seeking sweet, sweet revenge on that know-it-all dick questioning your tickmarks and indexing method, now you can give the PCAOB a taste of their own medicine.
Internal Oversight [PCAOBUS.org]
Invoking their continuing motto of “Better Late Than Never”, the SEC closed the Tyco case today as Dennis Kozlowski and Mark Swartz agreed to be banned from serving as directors or officers of a public company. The timing of this ban comes as a bit of surprise since these guys have been in jail since 2005 but we are talking about the SEC.
Since Bernie Madoff has a much longer sentence than the Tyco twins, the Commission will figure there’s no rush and he’ll retain his rights to serve as a director/officer until around 2020.
Settlement Ends S.E.C. Case Two From Tyco [DealBook/NYT]
It what amounts to a serious case of too little, too late, the SEC says that it will do more to protect investors in the wake of the Madoff scandal.
M. Schape and Co. would like you all (House Financial Services Committee) to know that they have been busy though. Working late. Working weekends. Working hard:
regulatory proposals include restricting short-selling in down markets, strengthening oversight of mutual funds, tightening scrutiny of investment advisers and making it easier for shareholders to seat directors on company boards. The S.E.C. is also working to identify emerging risks to investors, including so-called dark pools, or automated trading systems that do not publicly provide price quotes, Ms. Schapiro said.
See? Doesn’t that make you feel better? We’re the SEC, getting better at being less clueless since 2009.
S.E.C. Plans to Protect Investors More Post-Madoff [DealBook/NYT]
Another press release from the SEC today stating how they’ve thwarted yet another Ponzi scheme.
Ponzis being the norm lately we’re not terribly impressed by this but what we did find surprising was the title of the Commission’s press release: “SEC Freezes Assets of Florida Resident Stealing Investor Funds for Luxury Purchases” (that’s our emphasis).
Is the Commission making the assumption that those individuals that are actually reading the press releases need informed about what the money stolen is actually used for? Seriously, Bernie and Big Al don’t strike us Robin Hood types, even before indictments were handed out. No where in Bern’s statement at sentencing did he state:
Your honor, I’ve become increasingly despondent about the wealth gap in this country. I stole from the wealthiest individuals, investment companies, and charities possible in order to help the people that couldn’t help themselves. It was not my intention to take all my clients’ money. I merely wanted to level the playing field. I thought this method would be most effective as opposed to raising tax rates on the rich, which I’m personally opposed to.
Didn’t hear that did you? Let’s break this down: Bernie liked handjobs(and God knows what else, shudder) and Aston Martins. Stan liked doing bumps off hookers’ asses (we’re guessing here) and buying cricket teams (this is documented).
We will give the credit to the Commission for busting another scofflaw but we would now advise that knowing your reading audience is equally important.
SEC Freezes Assets of Florida Resident Stealing Investor Funds for Luxury Purchases [SEC.gov]
Deciding that it was about time they got their shit together, the SEC announced today that it is reorganizing its enforcement division. The reorganization will eliminate supervisory positions in order to reduce bureaucracy and help speed up response to potential fraud.
Before the proposed changes, the Commission had been utilizing the opposite approach.
A few details because we know you’re craving them:
The overhaul unveiled this week dissolves the division’s lowest and largest tier of supervisors, the branch managers who oversee small teams of attorneys, the people said. Some may become front-line investigators; others may be elevated to assistant directors. Assistants, who currently supervise about 18 people each, would instead oversee only six. A plan to create specialist teams, using a similar management structure, is still being refined, [sources] said.
We’ll also note that the new Enforcement Director, Robert Khuzami, said the new “specialist teams” will help detect “patterns” more easily. Khuzami also noted that this brilliant plan was being kicked around before the whole Madoff thing, thankyouverymuch.
SEC Said to Reorganize Enforcement Unit, Trim Management Ranks [Bloomberg]