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Notes:
1Member of the family means (donor or donee=d),
an ancestor of d,
the spouse of d,
a lineal descendant of d, or of d’s spouse, or of a parent of d,
the spouse of any lineal descendant described above, including a legally adopted child.
2If the property is transferred in trust, the trust’s tax identification number and either a brief description of the trust’s terms or a copy of the trust instrument should be included in or attached to the gift tax return.
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CPA and CPA Expert Are Not Synonymous
Francis A. Humphries, CPA/ABV, CVA
When financial issues are involved, the CPA expert is a valuable litigation team member. But, be aware that CPAs’ career paths are increasingly leading to specialization. That’s why just any CPA won’t do. Some CPAs are experienced in litigation assistance and that, perhaps, should be the first criteria for selection. But, additional specialties must also be considered. The litigation subject matter should control this selection process.
Business valuation, family law, financial services, taxation, information technology, auditing, and other attestation business and financial consulting, and forensic accounting, are among the many specialties to consider. A single CPA can no longer satisfy all needs of all clients and, more importantly in this context, cannot claim expertise in all financial matters; that is particularly true since the Daubert decision. To assume that CPAs are experts in even the most traditional service areas, such as auditing or income taxation, is to court failure. How, then, is a specifically qualified CPA expert to be found?
The American Institute of Certified Public Accountants (AICPA) has adopted two specialty designations that CPAs can earn by examination — Accredited in Business Valuation (ABV) and Personal Financial Specialist (PFS) — and others will follow. Another credible organization, the National Association of Certified Valuation Examiners (NACVA), requires education and testing before credentialing a CPA as a Certified Valuation Analyst (CVA). NACVA announced a new credentialing program for CPA litigation specialists that produced its first Certified Forensic Financial Analysts (CFFA) in 2000.
Other respected organizations offer programs not exclusive to CPAs, but many CPAs have earned the right to their specialty designations, such as Certified Financial Planner (CFP), Accredited Senior Appraiser (ASA), and Certified Fraud Examiner (CFE). And there are important programs that don’t confer specialty designations, like the investment advisors examination and the AICPA Certificate of Educational Achievement program. The requirements for credentials awarded by organizations not so well known should be investigated. In specialties where there is no credentialing or testing, experience must be the criteria.
The South Carolina Association of Certified Public Accountants (803-791-4181) is a good place to begin an inquiry. The depth to which the search for expertise should go will depend upon the importance of the expert in the litigation strategy and, quite frankly, cost relative to the potential award. In any event, references should be obtained and consulted. An inexperienced or unqualified "CPA expert" could be worse than none at all.
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How Do You Measure Business Performance?
Francis A. Humphries, CPA/ABV, CVA
 Business owners and managers are constantly bombarded with new “buzz words.” They come from all angles—print ads, junk mail, e-mail, computer-dialed telephone—and many of them have a common characteristic: something old in a new package.
“Performance measurement” doesn’t appear to be all that different. It’s been around for as long as there have been business managers. Many companies have some kind of performance measurement system, although they might not recognize it by that name and it might not completely meet their needs.
Being old in a new package is not necessarily bad. Performance measurement works. It’s time tested. The new packaging just creates renewed interest.
The “balanced scorecard,” as it’s called by some, performance measurements by any name—benchmarking, business metrics—is a system that gathers and reports lagging and leading, financial and nonfinancial indicators to help business managers make key decisions.
Most small business managers rely on financial statements to measure performance. And, for lagging indicators, that’s fine. But be aware that the usefulness of information decreases in proportion to its tardiness. The elapsed time between a financial event and observing its impact on the financial statements varies greatly among companies. In some cases, months pass before management action can be taken. Better late than never? Perhaps that’s true, but we all can agree that earlier is better than later; a well-designed performance measurement system gives early warning of trends needing attention before they become problems.
More often used by larger companies, comprehensive performance measurements can be of significant benefit to small and medium-sized companies, as well. Those managers would also like to develop strategies, be aware of their competitive position, monitor customer satisfaction, understand the motivation of employees, and know when to tweak internal processes, among other things; but when they are focused on putting out fires, there’s little time for it.
Often, small business managers lack the in-house technical skills to design and monitor a performance measurement system. Moreover, they are always concerned about diverting their attention from core operations like production and marketing. That’s why back office outsourcing has become so prevalent, not just for smaller businesses but for larger ones as well. Performance measurement systems, in whole or in part, can also be outsourced.
Businesses with one or more of the following characteristics are even more likely to need the information a performance measurement system provides.
- Mature companies with slowing or no growth
- Rapid growth, including growth through acquistions
- In industries with excessive competition
- Having problems with strategy implementation
- Introducing new products or expanding into new markets
- Business succession or management transition issues
There are four basic steps in a comprehensive performance measurement process,
1. Define strategy,
2. Develop performance measurements,
3. Implement the performance measurement system,
4. Monitor results and consider refinements,
5. and right back again to defining (or, more correctly, redefining) strategy; it’s a never-ending process.
Of course, that’s only a bare-bones outline. More likely than not, management and key employees have to work with a specialist to design and implement a system that is right for a company. Let’s take a little closer look.
Define Strategy
You might envision a closed conference with members of the management team focused on strategic planning. But, before the planning conference, you must know your present position among your competitors, where you want to position your company, what the competition is like, how your employees and customers feel, and more. With that information in hand, you can then plan how to navigate through the obstacles toward your company goals.
Develop Performance Measurements
Having defined your strategy, you know the sensitive factors for success. Measurements can be designed to monitor those factors and, therefore, your progress. Performance measurements can be financial or non-financial. They can also be leading or lagging. The company’s financial statements are an example of a lagging financial indicator. A leading, non-financial indicator, or measurement, might be the frequency of unsolicited client visits by your account managers. The first is designed to tell you what has happened in the past and the second to indicate what to expect in the future.
Implement Performance Measurement System
Of course, performance measurements don’t appear by magic. They are the result of a carefully designed system of capturing and reporting information. Many measurements can be obtained as by-products of existing systems, with little additional effort. Others are more difficult, so the extra effort and cost must be justifiable. A step-by-step implementation plan should be developed.
As with any significant change in internal processes, employees must be trained. Of equal importance, major emphasis must be placed on employee motivation.
Monitor Results and Consider Refinements
Management must be prepared to deal with unexpected measurement results. When they do not indicate sufficient progress, continuing the same processes are guaranteed to produce the same unsatisfactory results!
Measurements can be trends observed using internally generated information or benchmarking, comparing your company’s metrics to those derived from the industry in which it operates. Some benchmarking information is readily available, while some can be difficult to obtain.
Regardless of the source of measurement information or the care with which it is developed, performance measurements are not necessarily durable. Continuous refinement of the indicators is part of the monitoring process.
The performance measurement specialist’s role is that of facilitator and objective observer. Facilitation might take the form of assistance with development of measurements or help with the system to capture, report or monitor them. It might consist of identifying benchmarking sources or developing benchmarking information. As an objective observer, the specialist can provide insight that might be overlooked by those too close to the process.
The process itself provides valuable management information that might otherwise remain hidden. After working with even the simplest performance measurements, most managers can’t imagine making business decisions without them.
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Two New Accounting Standards Affect Large and Small Businesses
Francis A. Humphries, CPA/ABV, CVA
With the attention of financial professionals and business executives directed elsewhere, two decrees from the Financial Accounting Standards Board are quietly taking effect. These major changes haven’t been noticed because everyone is talking about accounting standards for SPEs, the infamous financial acronym heard so often in the congressional Enron hearings. That vehicle so prolifically used by Enron (perhaps, “spawned” is a better word) to ward off recognition of losses and delay its collapse, has become at once the center of attention and the butt of bad jokes. It is joined in that critical spotlight by its creator, the FASB.
Very few small companies will ever be affected by the SPE rules, but many will be touched by Standards 141, Business Combinations, and 142, Goodwill and Other Intangible Assets. The first eliminates the pooling of interests method often used in business combinations and establishes new criteria for segregating intangibles. The second, an even more troublesome one for small businesses, eliminates the amortization of goodwill and other indefinite-lived intangibles, instead requiring impairment testing. Still don’t see the problem? Well, read on.
Adoption of 142 cannot be delayed beyond Jan. 1, 2002. That means the first impairment testing must be done by June 30, 2002. Every business with goodwill or other indefinite-lived intangibles on its balance sheet is now required to determine if its market value is at least equal to its aggregate book value. If it is, there is no impairment and the process stops. But if it isn’t, every asset must be valued to determine whether or not it is impaired; i.e., its market value is less than its book value. And, except in certain circumstances, that process must be repeated every year and, sometimes, more frequently. What’s more, while your regularly engaged CPA can perform the first test, doing the second test creates an independence problem.
Questions about the consequences of non-compliance are already being raised. The answers depend on (1) the level of service provided by your outside accountant and (2) requirements of creditors, stockholders, and other users of your financial statements.
Any one of three levels of service may be provided by a CPA associated with the issuance of financial statements: compilation, review, or audit. In a compilation service, non-compliance would cause the CPA to modify the compilation report. Non-compliance would also cause modification of a review report. Depending upon the severity of non-compliance, an audit report would give a qualified opinion, disclaimer of opinion, or adverse opinion. If that same CPA performed the second step of impairment testing, a compilation report would include a disclaimer of independence in addition to the modification. But, a CPA lacking independence cannot issue a review or audit report at all.
So, what if you just don’t do it? Ask your banker or others who use your financial statements. Will they accept (and give the same credence to) a lesser service by your CPA firm? Or, will they accept a modified report on your financial statements because of non-compliance? Is some combination of these acceptable? After discussing this issue with the people who matter, and considering the alternatives, you might just decide to comply with the standards after all.
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by Francis A. Humphries, CPA/ABV, CVA