Interesting Perspective on the War in Afghanistan

This is a letter from a former member of the military who was serving the State Department in Afghanistan (click here). It gives an interesting perspective on what is going on there.

Honduras - The Other Side of the Story

I must admit that I had not paid much attention to the story of the removal of the president of Honduras. I saw a news report about it the other night, and decided to research the issues a little more. There is a pretty good article by the current president of Honduras that appeared in the Wall Street Journal (click here) explaining his side of the story.

I Know I Have Been Dwelling Too Much On Health Care, But Have You Heard About the "Medical Home"?

There is another article (click Here) you need to read about the health care debate. You will apparently be assigned a primary care doctor, who will be your "medical home". He or she will then decide if you need to see any specialists and, if so, where you should go. The "medical home" doctor will be rewarded for keeping your medical costs down (e.g. by not sending you to a specialist).

Health Care Taxes, Fees, Penalties, Caps and Limitations - An Analysis of What the Senate is Proposing

Here is an analysis from Forbes magazine of some of the things the Senate is considering related to possible health care legislation. Is this stuff nutty or what?

WIll the IRS Have to Provide Your Tax Records to the New "Heath Choices Commissioner" and the States?

I read a news report (here) that said the new health care bill will require disclosure of your income tax records to other agencies with the federal government as well as various state government agencies. I couldn't believe it and looked it up myself. I found it under Section 431(a) of the bill (click here and go to page 194). The IRS currently keeps pretty tight wraps on personal income tax data. Under this provision, your income tax data could be passed around outside the IRS to other federal and state agencies. Another one of the bad provisions of this bill.

Raising Tax Rates on Small Businesses is Not a Smart Strategy

Business First published my "Guest Comment" today on the subject of raising taxes on small businesses (click here). The text of the article follows:

On the surface, raising income taxes on individuals making more than $250,000 seems reasonable to many people (especially those making less than $250,000 per year).

When politicians talk about these higher earners, they paint the picture of the public company executives making millions of dollars per year.

However, I want to discuss another class of people for whom raising taxes will have a negative effect on our economy. This is the small-business owner.

Many small businesses are organized as pass-through entities such as S corporations or limited liability companies. The profits from these businesses pass through to the owner’s individual income tax returns.

As such, many of these small businesses will be caught up paying higher tax rates under tax schemes currently being proposed. This will have two possible negative effects.

Capital for expansion will decline

First, capital for business expansion will be decreased.

About 40 percent of the income generated by S corporations and limited liability companies goes toward paying income taxes. In the majority of cases, most of the other 60 percent goes toward reinvestment in the business.

This usually takes the form of hiring new employees, buying new equipment and expanding into new business areas.

If tax rates go up, businesses are going to have less money to reinvest in their business growth. In this poor economy, we should be doing all we can to encourage small businesses to hire people and expand their operations.

Owners will be encouraged to ‘coast’

Second, small-business owners might “coast” and not work as hard.

I have talked with a number of small-business owners about the possibility of tax increases. Many of them have an interesting perspective on this.

Small-business owners as a group generally have a natural instinct to grow and expand their companies. Of course, one key benefit of doing this is to make more money.

However, there are downsides to growing a business. These include risk, stress and time. Actively expanding a small business involves significant risk that the expansion will fail.

This, and the worries that accompany business growth, usually cause significant stress on the business owner. And, of course, any efforts beyond the norm are going to take more of the owner’s time.

Owners could scale back

A disturbing number of small-business owners are telling me that they are going to “kick back” if tax rates go up. They are going to maintain their businesses at a level adequate to support their families — but no more.

If tax rates are going to increase disproportionately as taxable income increases over a certain level, why take the risk and incur the stress of growing their business beyond current levels?

In fact, I think some of them actually are looking forward to having a legitimate reason to “coast” for a while. This is not the attitude that our tax policy should encourage.

Thus, increased tax rates on small businesses are likely to create incentives for their owners to not expand their operations and may even cause them to scale back.

And that’s not a smart strategy in these challenging economic times.

Are You Over 40 (Or Will You Be Someday)? Introducing the "Complete Lives System"

Have you heard of Ezekiel Emanuel? You should, because he is an adviser to President Obama on health care matters (click here). He is also the brother of the Presidential Chief of Staff, Raul Emanuel. He co-authored an article, Principles for Allocation of Scarce Medical Interventions (click on the title to see the entire article), in which he promotes the idea of "The Complete Lives System".

The Complete Lives System for allocating medical care considers a number of factors, including age. As the table above shows, people between age 15 and 40 are favored with respect to the distribution of medical care. As the article states, "the complete lives system produces a priority curve on which individuals aged between roughly 15 and 40 years get the most substantial chance...". The article says that the system "prioritises younger people who have not yet lived a complete life...". It goes on to say that the "allocation treats life-years given to elderly or disabled people as objectively less valuable."

These are the people that are now directing our country's health care strategy.

Whole Foods CEO in the Doghouse for Correct Views on Health Care Reform

One of the more talked about matters on the Internet today is an article written by John Mackey, the CEO of Whole Foods Market, about the current health care debate. Apparently, many of the Company's customers are up in arms about what he wrote, some even calling for a boycott. I immediately went to find the article (here) and found that it was well-written, well-reasoned and almost 100% in accordance with my views on health care reform. For example, I have long believed that expansion of health care savings accounts, along with more transparency of health care charges, was the beginning of the solution to spiraling health care costs. Having people spend their own money is going to make people better consumers of health care services. When the insurance company covers the majority of the costs, there is no incentive for the individual to review and understand the charges. At any rate, Mr. Mackey is in the doghouse with many of his customers for expressing his views (see the Whole Foods Forum page here ); however, I admire him for taking a stand.

Hurricane Bill

I finally got a hurricane named after me (here). I hope it doesn't hurt anyone. Track it here.

Health Care "Call In" Town Hall Meeting

I read today (here) where Congressman Yarmuth held a health care "town hall meeting" over the phone. They allowed people to call in and ask questions, but only after they were pre-screened. All of his fellow legislators are holding live town meetings and apparently taking a lot of heat over opposition to the health care plan. It didn't take Mr. Yarmuth long to figure out how to hold a town hall meeting in a way to avoid any controversy.

The Future of "Health Care" in America?

This is a story that has apparently been around for a while, but I just heard about. Barbara Wagner was covered by the Oregon Health Plan, the health insurance plan offered by the state. Her doctor prescribed a drug in an attempt to treat her lung cancer. However, the state health plan refused to pay for it. They did; however, offer to buy her some poison for a physician assisted death. Nice.

Hopefully, this is not a picture of the future of health care in America.

p.s. Here is the video with the "take a pill" comment by President Obama.

Benefits of Global Warming "Research"

The Wall Street Journal recently reported (here) that 10 members of Congress went on a global warming fact finding "mission" to Australia. Global warming "research" apparently included diving and snorkeling at the Great Barrier Reef, cable car tours through the rain forest and a side trip to the South Pole. Of course, many of their spouses came along for the "research". I can see now the benefits of being interested in all this global warming stuff! By the way, we haven't been hearing much about global warming recently since the average July 2009 temperatures in most of the country have been 2 to 8 degrees lower than the 30 year average.

Good News for U.S. Energy Production?

I didn't even know there was such a thing as oil being in rock, but that's what this article says. I found this company that says it is already drilling test wells in North Dakota. Here is an older article that explains the process. Interesting.

More Planes for Congress?

It seems that the folks in congress that write the budget have penciled in some extra airplanes to the Air Force budget that the military didn't ask for (click here). The Air Force apparently asked for one C-37 and three C-40s. Congress added two more C-37s and two more C-40s. It is interesting to note that these planes just happen to be the type that the Air Force uses to fly members of Congress around. It also interesting to note that the C-37 is really a Gulfstream G550 business jet and the C-40 is a Boeing 737-700 business jet. Spend away!

I Have Been Down The Hole

Here is a good article from The Lane Report about the Louisville Water Company's Riverbank Filtration Project. It outlines in very understandable terms, the advantages of this type of system. Earlier this year, I was fortunate to be able to tour the project. We were lowered down a 150 foot shaft (that's about 15 stories for those of you bad with math) in a "cage" at the end of a crane. Definitely not for the faint of heart. Once I got down there, we were able to go part of the way back the 1.5 mile tunnel that ran out towards the river. Pretty cool!

Illustration of the New Health Care Plan

Here is an illustration of the new health care plan. Simple, huh?

I Hate To See Any Company Go Out of Business, But In This Case ....

I read today that the "Crocs" could be on their way out. The company that makes them lost $185 million last year. It seems that they are falling out of favor with the trendy and fashion conscious. See the report here. I hate to see any company go out of business, but this was some of the worst looking footwear ever conceived. The stock price hit almost $70 per share in October 2007. It closed today at about $3 - ouch!!

Calvinism Gets Some Press

I ran across this article in a Nashville newspaper. It seems that the tenets of Calvinism are gaining a resurgence among some younger Christians. While I wouldn't label myself as a "Calvinist", I generally believe that Calvin interpreted the Bible correctly. For me, this "high view" of God helps explain many of the difficulties I used to have with some of the things I read in the Bible. Here is another older article I found that discusses Calvinism. I would encourage you to read the Bible and make your own determinations about wthat it says after careful and reasoned study.

IRS 1099 Forms For ALL Business Payments?

Here is an article about the proposal to require 1099 forms for all business payments, even from corporation to corporation. Right now, Forms 1099 are only required only for payments non-corporate recipients (e.g. individuals). Can you imagine the increase in 1099 volume that would be required for all businesses to give 1099s to all other businesses they make payments to? And how would they match up all of this? As the article states, an IRS study found that businesses with gross receipts under $500,000 currently spend about 5% of their revenues on tax compliance. This might be good for CPAs who would likely have to help their clients implement the new requirements; however, it would be bad for the business community.

The Missing Link?

Perhaps you have heard about "Ida", the new fossil that is being presented as the missing link between humans and their supposed ape-like ancestors? Ida is about two feet long and is apparently similar to a modern day lemur (below). The National Geographic people are proclaiming that the missing link has been found. Others think it is all "hot air". At any rate, I am not seeing the resemblance to any humans I know (although, I will admit, I don't know any two foot people).

"A People Belonging To God"

In matters of faith and religion, there are many debates on different theological positions and on different interpretations of the Bible. The discussions of these can be endless. When you boil it all down, what would you say is the overall point of the Bible and the Christian faith? Is there an overarching theme?

I would argue that the primary reason the world and mankind was created by God was to develop a group of people that would be His forever. Consider the following:

• 1 Peter 2:9-10 - "But you are a chosen people, a royal priesthood, a holy nation, a people belonging to God, that you may declare the praises of him who called you out of darkness into his wonderful life. Once you were not a people, but now you are the people of God ..."

• Titus 2:13-14 - "... while we wait for the blessed hope - the glorious appearing of our great God and Savior, Jesus Christ, who gave himself for us to redeem us from all wickedness and to purify for himself a people that are his very own, eager to do what is good."

• Deuteronomy 26:19 - "He has declared that he will set you in praise, fame and honor high above all the nations he has made and that you will be a people holy to the LORD your God ..."

• Ephesians 2:19 - "Consequently, you are no longer foreigners and aliens, but fellow citizens with God's people and members of God's household ..."

God doesn't need humans in order to be complete. But, for some reason, He decided He wanted a people "that are his very own".

Pascal's Wager

Blaise Pascal (1623-1662) was a French mathematician, physicist, and religious philosopher. He developed an interesting way to look at the question of the existence (or not) of God. He argued that a person should "wager" as though God exists, because in living in this way, that person has everything to gain and nothing to lose. His reasoning can be summarized as follows:

• If I believe and God exists - I'll be happy for eternity and have infinite gain.
• If I believe and God does not exist - I've lost nothing and gained nothing.
• If I do not believe and God exists - I'll be punished for eternity and have infinite loss.
• If I do not believe and God does not exist - I've lost nothing and gained nothing.

So, why not live for God and "wager" on infinite gain for all eternity?

AIG - Another Perspective

It always makes sense to hear both sides of an issue before passing judgment. Here is a letter from a top level AIG executive to the CEO of the company.

It Was Too Cold To Do Global Warming Research!

It was interesting to note that the global warming researchers were having trouble doing their work at the North Pole because it was too cold! Here is the article.

Hard to Comprehend!!!

I can't see any amount of economic growth or tax increases getting out of this one if it happens. Talk about red ink!

Fast Fifty Again!

I am pleased to let you know that Strothman & Company was named a "Fast Fifty company by Business First for the second year in a row. The Fast Fifty represents the 50 fastest growing private businesses in the Louisville area. We are the only CPA firm that has ever made the list. Thanks to our great clients and staff for allowing this to happen.

U.S. Auto Industry Bailout?

It is interesting that the current Business First poll has almost 80% of the respondents saying that the government should not bail out the U.S. auto industry. An article in Today's New York Times by former presidential contender Mitt Romney makes that case. I've had several clients who wanted to chit-chat about the issue, so I though I would pass on some information.

p.s. It probably wasn't too smart for them to fly to Washington in their private jets. See the article.

Financial Accounting Standards Board Codification

One of the most difficult things about accounting is getting one's hands around the various accounting rules. There has never been a good "one stop" place to get all of the answers about generally accepted accounting principles ("GAAP"). The Financial Accounting Standards Board ("FASB", pronounced "fas-bee") is trying to rectify this by creating the Accounting Standards Codification. The first draft of the Codification has been completed and is available free here. Just click on "Registration".

Purchase Accounting Changes Are Coming

This was a fascinating article about the upcoming changes to purchase accounting. Click here. The changes will be effective for calendar 2009 and after. One interesting change is that acquisition costs will be written off. Also, acquirers may be able to recognize a gain from a "bargain" purchase of another company.

So, How Was The Wynn Hotel?

In my last post, I said we stayed at The Wynn Hotel in Las Vegas, So, how was it? For a hotel with over 2,700 rooms, they did a pretty good job. The decor and standards of the place are pretty comparable with the Bellagio. We had a room on the 39th floor overlooking the Strip. I would definitely ask for this view if you stay there. The service was a tad inconsistent, but nothing more than I would expect with such a large hotel. We went to see the show, Le Reve, which was fantastic. We got our tickets at the Half Price Ticket place in the Fashion Show Mall across the street (up next to the food court). We paid about $75 each for third row tickets that retail for $140 each. We had dinner one night at the Daniel Boulud Restaurant. Get the Caesar Salad and the Short Ribs. It's expensive, but I promise you won't be sorry.

Increase the Value of Your Business By Demonstrating Growth

This June, I attended the annual conference of the National Association of Certified Valuation Analysts at The Wynn in Las Vegas. See www.nacva.com for their web site. I attended a variety of classes on various business valuation subjects. One of the most interesting was a presentation by an investment banker. While many of the classes at the conference were theoretical, the investment banker talked about the subject from a practical standpoint.

He basically said he would almost always buy solid businesses at five times earnings (which equates to a discount rate and a capitalization rate of 20%). However, if he were to go beyond five times earnings, the seller would have to prove to him that the business had an opportunity to grow. If the business had growth potential, the multiple paid could be increased. The chart below illustrates this. For example, an expected long-term sustainable growth rate of 5.7% means that a cap rate of 14.3% results when using a discount rate of 20%. The 14.3% cap rate equates to a multiple of 7.

I hope I've explained this in a way that makes sense. If not, please e-mail me. The bottom line is this. If you are looking to sell your business, and you want a value more than a multiple of five, you better be able to demonstrate to a buyer that the business has long-term, sustainable growth potential.

	Capitalization Rate
		Less
Discount		Growth	Cap
Rate		Rate	Rate			Multiple
20.0%		0.0%	20.0%			5
20.0%		3.3%	16.7%			6
20.0%		5.7%	14.3%			7
20.0%		7.5%	12.5%			8
20.0%		8.9%	11.1%			9
20.0%		10.0%	10.0%			10

Extended Partnership and Trust Due Dates Shortened

The tax returns for partnerships (including limited liability companies) and trusts are due on April 15th. Right now, they may be extended six months until October 15th. That's going to change in 2009 and beyond. The new extended due date is September 15th.

IRS Increases Mileage Rate

The current IRS mileage rate will increase from 50.5 cents per mile to 58.5 cents per mile effective July 1, 2008.

Young and Old Without Distinction Leave This World; Therefore Fail Not To Secure the Next

Becky and I went to Nassau, Bahamas in April 2008. We found Christ Church Cathedral, an Anglican church founded in 1670. The church had a number of plaques on the inside wall dedicated to loved ones who had died. I was particularly drawn to the plaque for Emma Blatch. It read as follows:

"In memory of Emma Clementina Blatch, whom it pleased the Almighty to visit suddenly in the bloom of life with a severe fever, of which she died, October 16th, 1825, aged 19. Her earthly remains are deposited in Potters Field. Her spirit is with God.

Reader! Whoever thou art, let the sight of this monument imprint on thy mind, that young and old without distinction leave this world; therefore fail not to secure the next."

To me, this was a striking reminder that our primary goal in this life is to "secure the next".

Inc.credible!!!

Strothman & Company won the 2008 Inc.credible Award from Greater Louisville, Inc. in May in the 50 to 99 employee category (click here). The firm was up against strong competition against companies in a variety of different industries. We are the first Louisville CPA firm to win this award, and are incredibly grateful to our staff and clients who made it possible for us to receive this recognition.

Full Payroll Tax Penaties Assessed To Unsuspecting Company

One of my partners pointed out the following court case to me. In this case, the company was assessed full penalties for failure to deposit employment tax withholdings, even though the owner/officers were completely unaware it was occurring. The owner apparently had no earthly idea his in-house personnel were failing to perform their payroll tax responsibilities. Only a portion of the withholdings were not properly paid the Treasury, so even a close review of the financial statements might not have triggered a question. A recommendation would be that someone, not in the line of responsibility, occasionally review the payroll deposit and reporting compliance. This case may be the most compelling argument for a company to use a third party payroll service. We’re an accounting firm, and we outsource our payroll!

Don Johnson Motors, Inc. v. U.S.,

DC TX, 101 AFTR 2d 2008-370 , Civil Action No. B-06-047, 12/21/07

A district court has ruled that employment tax penalties and interest for the 1999-2002 tax years could not be abated due to reasonable cause, even though the taxpayer was unaware that its in-house accountant and its office manager had failed to perform their payroll tax duties. However, the court said that there may be reasonable cause to abate an employment tax assessment for the 2003-2004 tax years because of a bank error.

Employee error. From 1999 to 2002, Don Johnson Motors, Inc. delegated its payroll tax functions to an in-house accountant, Michael Ezequiel, who performed his role under the supervision of the company's office manager. Ezequiel prepared the company's employment tax returns and was also in charge of monitoring the payroll accounts and the information included on Forms 940 and 941. At some point in 1999, for reasons not explained, Ezequiel stopped paying portions of the company's payroll taxes. As a result, Don Johnson Motors made incomplete deposits to the IRS from 1999-2002. The executives of Don Johnson Motors were unaware of this problem until December 2002. Shortly thereafter, the IRS assessed penalties against the company for failure to file employment tax returns and to timely pay taxes.

Exception to penalty. Code Sec. 6651(a) allows an employer to avoid penalties for noncompliance if it can show that its failure to file, pay, or deposit taxes was due to “reasonable cause” and not willful neglect. Don Johnson Motors requested an abatement of the aforementioned penalties based on Code Sec. 6651(a).

Ruling on employee error. The district court denied the taxpayer's abatement request. In issuing its ruling, it noted that other federal courts have consistently held that the failure of a taxpayer's employee to file or pay taxes does not establish reasonable cause. The district court also distinguished the current ruling from the case of American Biomaterials Corporation, 69 AFTR 2d 92-611 (1992). In American Biomaterials, the Court of Appeals for the Third Circuit ruled that there may be reasonable cause to abate employment tax penalties when corporate officers commit criminal acts (e.g., embezzlement) against the corporation. The district court distinguished the Don Johnson Motors case from that one by pointing out that Don Johnson Motors had never presented any evidence that its in-house accountant and its office manager had engaged in any criminal action. The district court said that the employment tax deficiencies incurred by Don Johnson Motors simply resulted from having “lax internal controls or failing to secure competent external auditors that even the court in American Biomaterials stated was insufficient to establish reasonable cause.” The district court also rejected the taxpayer's argument that there was reasonable cause to abate the penalties because of the lack of notification from IRS that the company was falling behind in its tax obligations. The court cited Code Sec. 6151 and said that IRS was under no obligation to provide taxpayers with notice that they failed to file their returns or pay their taxes.

Watch Out for Scams Using the IRS Name

Caution! Several of my clients have received a very official looking e-mail from the IRS that says a refund is due them. It asks for personal data in order to process the refund. The trouble is, the e-mail is not from the IRS. The IRS never sends e-mails to anyone. Please click here to see an IRS release about e-mail and phone scams currently going on using the IRS name.

Strothman & Company 25th Anniversary

I am pleased to let you know that Strothman & Company's 25th anniversary is on February 1, 2008. The firm began on February 1, 1983 with just Ray Strothman, a card table and a calculator (as the story goes). It has been a significant achievement for Ray to grow the firm into one that now employs over 50 people. We are now the 8th largest firm in Louisville (total professionals per 2007 Business First survey). Congratulations to Ray and all of the people who helped build the firm.

Additional Thoughts Regarding the New Auditing Standards

I wanted to write some additional thoughts regarding the new auditing standards (see my previous post about the new standards). These new standards will first be effective for entities with a December 31, 2007 year end. The majority of people in the CPA profession are estimating that the new auditing standards could raise fees anywhere from 15% to 30%. I am hopeful that this will not be the case, at least with respect to more sophisticated, well-controlled organizations.

I am not yet an expert on the implementation of the new auditing standards. However, here are my impressions after attending a full day course on the implementation of the new standards, after reading about them, and after attending the CPA Associates International Accounting & Auditing Conference in New York in October 2007.

The new standards focus on doing a risk assessment before planning the audit work. Then, the audit work that is determined to be needed is “linked” to the risk assessment. For most of my existing clients, I believe I already have a pretty good understanding of the client’s risks. The new standards simply make us put our risk assessment analysis down on paper, which I don’t necessarily see as a big deal. It may be as simple as picking up a recorder and doing a “brain dump” in the form of a memo or similar narrative.

We have talked about “linkage” in the CPA profession for many years, but have always had difficulty actually doing it. Some of the vendors who provide “practice tools” to assist CPAs have developed products I believe will be very helpful in implementing the new standards. For example, Practitioner’s Publishing Company (“PPC”), a leader in providing such products over the years, has a new product called SMART e-practice Aids that will hopefully greatly simplify the “linkage” process. You “check-the-box” with respect to your risk assessments and it produces one of three results for a particular audit area: (1) no audit program – only an analytical review is performed, (2) a limited procedures audit program or (3) an extended procedures audit program. The extended procedures audit program basically looks like the PPC audit programs we have historically used. The use of # 1 and # 2 is where I think auditors will save time and effort because of this approach - - - less work will be required in these two situations.

On larger, more sophisticated entities, I am hopeful that the additional audit time we spend on the “front end” will be offset by less detailed audit work needing to be done on the “back end”. My hope is that the revisions to the audit approach will actually make auditing more interesting by focusing on our client’s business and risks; the same things that concern them. Also, we will only be doing detailed substantive audit procedures in areas where they are really needed (audit program # 3 referred to above). Until I learn differently, my view is that the new standards are going to help rather than hurt in CPA performing effective, efficient audits for these type of organizations.

Tracking Air Flights

I found a web site that gives the minute by minute status of any flight in the U.S. It even has a little map to show where the plane is in the air at any given time. I used this to track my son coming home from college today. See http://flightaware.com/ or simply click here.

Strothman & Company Makes 2007 Fast Fifty List

Strothman & Company was recently notified that it made the 2007 Business First "Fast Fifty" list. This list, compiled annually by the local business newspaper, records the 50 fastest growing privately-held businesses in the Louisville area. The criteria is the company's revenue growth over a three year period. It is especially exciting that we were the first CPA firm that ever made the list.


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Twelfth Annual Strothman & Company CEO/CFO/Controllers Conference

Strothman & Company will have its Twelfth Annual CEO/CFO/Controller's Conference on Tuesday, December 4, 2007 from 8:00 to Noon. It will be at Owl Creek County Club in Anchorage, Kentucky. Check our seminar web page here for more information. Check back later this year for a schedule of our 2008 seminar series.

The Conference will begin at 8:00 a.m. with a keynote address by Mary Mosley, President and Chairman of Al J. Schneider Company. Mosley is the daughter of the late Al Schneider, the developer who built the hotels. She is also the head of Al Schneider Cos., which owns the Galt House Hotel & Suites.

At 9:00 a.m. Denise Brown-Cornelius JD, CPA, Director of Tax Services, and Tim Martin, CPA, Senior Manager, at Strothman & Company will present an executive summary of new tax laws and their impact on businesses and individuals. Denise and Tim will also review important tax saving strategies for you and your business and a checklist of actions to take now that will save “Big Bucks” later.

From 10:00 until Noon, we will have breakout sessions on a variety of topics.

Article in Practical Accountant Magazine

The November 2007 issue of Practical Accountant magazine has an article entitled "Inside An Advisor's Investment Mix". In the article, the author quotes me regarding my approach to investing. The article is posted on-line here if you are interested.

CPA Associates International - Annual Meeting

I am attending the 50th annual meeting of CPA Associates International ("CPAAI") at the Marriott Marquis Times Square in New York City (October 21-24, 2007). CPAAI is an international association of CPA firms with 150 members in 70 countries worldwide, including 45 in the United States. The meeting covered a broad range of accounting, auditing, tax, consulting and practice management topics presented by some of the top authorities in our profession. In addition to many U.S. members, attendees included over 30 international members from countries such as Australia, Russia, Japan. The Netherlands, Mexico, England, Hong Kong. Belgium, Germany, Romania, Italy and California (just kidding - I knew that was in the U.S.).

It is exciting to be at the 50th annual meeting - - - CPAAI is the oldest association of CPA firms in the United States. It is especially exciting that tonight, Ray Strothman, our firm's founder and managing partner, is being installed as the U.S. Chairman of CPAAI for a two year term. Our membership in CPAAI allows us to serve our clients effectively throughout the U.S. and the world. It also provides us with valuable opportunities to exchange ideas, information and expertise with some of the profession's leading practitioners. Strothman & Company has been a member of CPAAI for about eight years.

Family & Children First

I recently joined the board of directors of Family & Children First ("FCF"). This organization provides counseling and crisis management services to families with children, most of whom are poor. They deal with some of the most difficult situations families face, with clientele in a 14 county service region (KY and IN).

I wanted you to be aware of some upcoming events that might fit into your "networking" plans.

• Purse Strings. Rodes for Her is sponsoring "Purse Strings" on October 25, 2007 from 6:00 to 9:00 pm at their store. The event is no charge. They raise money by auctioning off purses. See details here. All proceeds benefit FCF.
  

• Women's Resource Market. Another event directly primarily at women is the Women's Resource Market from 10:00 am to 3:00 pm on November 3, 2007 at the Hyatt Place on Hurstbourne Lane. Tickets are $10. See details here. Again, all proceeds benefit FCF.
  

• Family Reunion Breakfast. Finally, FCF is having their Family Reunion Breakfast on November 16, 2007 from 8:00 to 9:00 am at The Olmsted. There is no charge. If you would like to go and sit at my table, please let me know.

Additional details regarding FCF are on their website, here.

Changes To Auditing Standards

Following is the text of a memo I sent to my clients regarding changes in auditing standards affecting financial statement audits.

Introduction

Auditing standards have changed gradually over the years. As a profession, CPAs have not always done a good job of explaining these changes to our clients. One reason is that auditing standards aren’t particularly interesting to you or relevant to your day-to-day responsibilities.

Most changes in the past few years have been as an indirect effect of high profile business failures such as Enron and WorldCom. The Sarbanes-Oxley Act (“SOX”) was the first response, but this only applies to publicly-held companies. The auditing profession is now experiencing the “trickle down” effect of SOX. This means that the auditing standard setting bodies are looking at trends with respect to audits of public companies, and incorporating some of those into requirements that apply to non-public companies, governmental entities and non-profit organizations.

Reporting of Internal Control Matters

One significant change that recently became effective was Statement on Auditing Standards (“SAS”) No. 112. This standard requires us to specifically identify, in writing, certain internal control matters we find. The requirement to put these findings in writing is new. For some internal control matters we note, we are required to label them as “significant deficiencies” or “material weaknesses”. In many cases, use of these terms seems harsh; however, these are the phrases SAS 112 says we must specifically use. SAS 112 has a lower threshold as to what internal control matters must be reported to management and those charged with governance. The implementation of this standard is subject to a wide variety of opinions among CPAs and has often been stressful for auditors to implement.

The New “Risk Assessment” Auditing Standards

Some of the most significant changes in audit procedures in a number of years will soon be effective (for years ended December 31, 2007 and after). Rather than provide you with all the numerous details of the new standards, I wanted to point out some of the changes that may affect you or be apparent to you. Some of these changes include the following:

> Auditors will now be required to spend much more time in the planning phase of audits. This time will be spent (1) obtaining a more in-depth understanding of your organization and its environment, (2) a more rigorous assessment of the risks, specifically noting where and how the financial statements could be materiality misstated and (3) improved linkage between our assessed risks and the nature, timing and extent of audit procedures performed in response to those risks.

These new risk assessment standards will result in new and expanded audit procedures. Our audit planning will include performing an in-depth risk analysis, evaluating internal controls, having discussions with management, and performing other preliminary audit procedures. Some have estimated that up to 30% of the audit time will be expended prior to beginning the year-end auditing procedures. The risk analysis that is performed will be tied directly to the auditing procedures we develop. At Strothman & Company, we have generally always used a risk-based auditing methodology. However, now the linkage between the risk assessment and the audit steps will be more formal.

> We will now be required to talk with a wider range of people within the organization, and will be required to make a wider range of inquiries. In addition to an organization’s financial professionals and chief executive officer, we will now be encouraged to speak with key people in areas such as operations, information technology, human resources, and risk management. In addition, we will need to speak with “those charged with governance” (such as representatives of the audit committee or finance committee).

> There is a developing expectation that organizations will design, implement, document and test their own internal controls. As part of the risk assessment process, we will be looking at your efforts along these lines, and will be making comments for improvement as appropriate.

> Auditors will be required to look at an increased level of underlying documentation. Client explanations of transactions will need to be supplemented by review of documents and accounting records.

> When I entered the profession, “materiality” was unofficially defined as 5% of a particular amount or account balance. This percentage, of course, was never found in the professional literature. It was just a “rule of thumb” that arose over time. As auditing standards have evolved, the concept of materiality has been expanded. Auditors must now not only consider percentage relationships, but also have to evaluate a number of “qualitative” factors. Generally speaking, going forward, a better set of financial statements and a smoother audit will be the result if all known financial statement misstatements are recorded before the auditor shows up.

I hope the above explanation is helpful to you and will help you understand why your auditors may be acting a little differently than in the past. If you have any questions, please let me know or contact any member of our Strothman & Company team. We look forward to serving you.

Required Disclosure Regarding Advice

Any advice given on this blog may or may not be suitable for your individual situation. Any plan of action you may consider should first be checked out with your personal tax adviser and/or attorney.

Also, any advice given on this blog is not intended or written to be used, and cannot be used by any recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code and is not intended to be used or referred to in any marketing or promotional materials. This disclaimer is made to comply with Circular 230, which governs practice before the Internal Revenue Service.

Determining If New Workers Are Legal

I’ve had clients inquire about their responsibility for determining if a new employee is legally authorized to work in the U.S. The first step in this process is completing Form I-9, Employment Eligibility Verification. The employer is responsible for making sure this form is completed. The employee must provide documents supporting his/her legal work status within three days of starting work. If they cannot, they can present a “receipt for the application of the documents” within three days and supply the actual documents within 90 days.

Employers are not required to independently verify documents presented. In fact, the instructions to the Form I-9 say “An employer cannot request that an employee present more or different than are required or refuse to honor documents which on their face reasonably appear to be genuine…”. The instructions also include several pages warning employers that they cannot discriminate based on apparent national origin, among other factors, and outlines how employees may file complaints against the employer with the U.S. government. Clearly, an employer could easily be intimidated with the consequences of questioning the validity of documents presented.

Another key step in adding new employees is obtaining a Social Security number. This is done by asking the employee to complete Form W-4, Employee’s Withholding Allowance Certificate. The employer is not required to verify the Social Security number provided, although the IRS does provide several ways to do this. If an employer receives an IRS notice that indicates an employee’s Social Security number may not be correct, they are required to make a “annual solicitation” to the employee for a corrected number. If the employer receives another IRS notice, they are required to make a “second annual solicitation”. The employer simply needs to document that they made the required solicitations. They do not need to force the employee to respond. Also, the IRS guidance states that “Employers should not use receipt of an IRS notice as grounds for employee termination.” As such, the employer is covered as long as they make the two inquiries and documents their attempts to do so.

A few observations. First, employers are generally not trained in the art of determining whether documents are valid or false. In fact, as noted above, the government puts forth a disincentive for asking employees too many questions in this regard. Secondly, the employer has very little responsibility with respect to verifying Social Security numbers. If the two annual “solicitations” are made and documented, they are off the hook (apparently even if they never get a correct number from the employee). Employers certainly do not need any more requirements heaped upon them. However, in my opinion, the current government system makes it relatively easy for illegal aliens to work in this country, and even perhaps continue working indefinitely.

Coach To The Goal

My good friend Michael Duke provides services to companies looking to recruit, motivate, coach and retain great employees. He has helped our firm over the years and has made a positive impact on our recruiting and employee development process. I recently attended one of his seminars, Coach To The Goal, and recommend it. The dates and times of this and other upcoming Michael Duke seminars may be found here. He also recently published a new book by the same name, which may be found here. Please contact me if you have any questions about Michael's services or qualifications. I'm a big fan!

French Lick and West Baden Hotels

My wife and I just returned from two nights at the French Lick Springs Hotel (1901) in French Lick, Indiana. It is about an hour and a half from Louisville. In years past, we had stayed at the hotel several times and had toured the West Baden Springs Hotel (1902) while it was in the early stages of being remodeled (this is a picture of the lobby, which they say was the largest dome in the U.S. until the Louisiana Superdome was built).

They added a casino in 2006 and extensively remodeled both hotels. The results are amazing, especially the West Baden Springs Hotel. It was wonderful to see how these two great hotels have been restored. They are certainly both up to the standard of any four or five star hotel in which we have stayed. The room rates reflect this; however, we found that they fell substantially after the weekend. I would encourage you to check it out.

Seminar: "Entrepreneurism as a Growth Strategy"

Why are entrepreneurs so successful?

I have found that entrepreneurs are among the most successful businesspeople. They build high-growth, exciting companies and attract great customers. How do they do it?

In analyzing our entrepreneurial client base, we found ten common factors. First, they have a constant focus finding new customers, whether they really “need” them or not. They know that even great companies experience customer turnover and that businesses only move in one of two ways: up or down. There is no status quo. Companies that don’t focus on growth eventually decline. Secondly, entrepreneurs surround themselves with exceptional people. While they may want to be the “top dog”, they realize that building a great company is a team effort. They surround themselves with top talent and find innovative ways to compensate them.

At our upcoming Strothman & Company seminar, we’ll discuss these factors and eight more that characterize successful entrepreneurial high-growth companies.

We are presenting "Entrepreneurism as a Growth Strategy" at Owl Creek Country Club from 8-10am on September 20, 2007. Call 502-585-1600 for reservations or click here

Collecting Information About Customers - The Mackay 66

Harvey Mackay owns a company that sells envelopes. A key factor in his success has been getting to know his key customers very well. He has written several best-selling books including "Swim With the Sharks Without Getting Eaten Alive". Click on this link to see the book: www.amazon.com. Mr. Mackay has developed a list of information he tries to collect on all of his key customers, which he calls "The Mackay 66". You can obtain a PDF of this at harveymackay.com/pdfs/mackay66.pdf . I believe this is a good guide to use to begin collecting information about your customers.

Mt First Blog Post

I decided to try my hand at setting up a blog. I wanted to have a place to offer business advice, as well as to post information regarding spiritual matters.