Tuesday, December 21, 2010

Howard’s Inner Circle, No. 25: 1+ 1 = …

I noticed a significant, surprising, and welcome change at the recent New York State Society of CPAs’ 2010 Practice Managing Conference. All four accounting firm managing partners freely shared on a panel and in roundtables at lunch their views on firm mergers and acquisitions. It wasn’t a discussion in the clouds as they didn’t play it close to the vest as many managing partners normally do. They openly shared providing extensive details on all aspects of the merger process including their individual firm’s merger philosophy, retirement funding, capital requirements, payouts, and method of integration.

Here is my take on their cumulative M&A wisdom:
1. A Real Due Diligence--Determining compatibility of cultures requires “dating.” It goes beyond financials, getting firm information, and meetings with the managing and other partners. It can involve walking around a firm unaccompanied and going with a prospecting partner to present a proposal to a possible client.
2. Use of Guarantees--To get needed buy-in and alleviate anxiety, incoming partners can be guaranteed in the first two years that they will earn at least what they previously earned. Some firms have a no-harm, no-foul one-year period that allows for a quiet unraveling of the merger or the departing of an unhappy incoming partner. This option is rarely exercised and included to provide comfort that the merger isn’t cast in stone.
3. Maintain a “No-Jerk” Zone--Closely evaluate incoming partners so a problem partner isn’t brought aboard. Interestingly, the other incoming partners are usually happy that individual is gone.
4. Pay Attention to Integration--Transition should begin quickly and be comprehensive. Benefits, culture, career development, and opportunities should be detailed. Training is instituted right away as well as meetings are conducted to provide quick and effective integration of practice areas and niches.
5. Belief in Increased Value--There is a significant distinction between an actual merger and an acquisition. Just calling something a merger doesn’t make it so. A real merger is based upon a substantial potential for increased value. 1 plus 1 equals at least 3. For example, it might be that growth is identified by the offering of more services to key clients of the firms. This is in contrast to an acquisition which is simply a retirement payout to retiring partners. The ultimate actual payouts with regard to mergers and acquisitions significantly reflect the differences.
6. Individualized Guidance--Professional coaching should be given to each partner so they fully understand and acclimate to the new firm.
7. Understanding Why--The reason for a firm merging in often involves succession issues such as retirement funding or an inability to grow. In contrast, the more dominant firm might need a niche, more staff, or expansion into a new geographic market. Both should understand why the merger is being sought by the other. A merger should always be part of a comprehensive strategic plan.
8. Better Usage of Staff--A merger allows a firm to reassign staff and place them in more suitable positions. Larger firms permit greater specialization whether it is a particular practice area like taxes or a niche like litigation support.
9. Greatest Difficulty--There are always problems incurred with a merger or acquisition. Even if everything is done right expect some. The most common one involves software, such as when the two firms were using different tax software. It can take a full one-year cycle to rectify.
10. Be Realistic--In a merger there is usually one dominant firm and that firm’s culture and processes and procedure will, with minor exceptions, normally control. It is rare to see a real merger of equals. The reason is for that to be successful there needs to be the creation of an entirely new culture with attendant new processes and procedures.

I walked away from the conference with the distinct impression that each of these managing partners represents a new type of firm leader. One who really understands that win-win is an integral part of their successful firm business model.
© 2010
The above may be reproduced in full if that fact is stated and Howard Wolosky at http://howardwolosky.blogspot.com is credited as the author.

Thursday, December 16, 2010

Howard’s Inner Circle, No. 24: Outsourcing as a Revenue Center

For many years, the local branch of a nationwide bookstore, upon request, gift wrapped the book that you purchased. There was a choice of at least five wrappings and a cute little bow was attached. This week when I purchased a book, rather than the cashier wrapping, it I was directed to two individuals in pink at the end of the counter. They were obviously affiliated with a foreign dance company. I knew this because there was a video playing by them. As one took the book to wrap the other began to talk to me and gave me a brochure with performance information for the dance company. Neither understood when I asked if they had wrapping paper other than holiday wrap. When I picked up the wrapped book I noticed much cheaper paper was now being used, the wrapping looked amateurish, and there was no cute little bow. As I left I wondered if outsourcing of the wrapping is a revenue generator for the store.

Outsourcing is increasing, often hidden, whether it is a mattress delivery by a leading mattress seller or service provided by the support staff of a technology company. At first cost cutting was the primary motivator for outsourcing, now that is coupled with a motivation for revenue generation. I am still getting calls from the technology company’s so-called support staff trying to sell me a product for my computer.

Increased efficiency and continued effective delivery of a quality product or service should be the primary objective when outsourcing is utilized. If the focus is too much on cost cutting and revenue generation quality may suffer. Is this bookstore ensuring a deterioration of a number of long-term customer relationships each time a book is wrapped?
© 2010
The above may be reproduced in full if that fact is stated and Howard Wolosky at http://howardwolosky.blogspot.com is credited as the author.

Thursday, December 9, 2010

Howard’s Inner Circle, No. 23: “Customer Crazy Glue”

I first saw it when I was with Practical Accountant. Tax research companies began purchasing tax prep software companies followed by the acquisition of those companies specializing in payroll software and CRM systems. The acquisitions allowed for suite offerings. The suite business model is based on the idea that it is more difficult for a somewhat unhappy customer to leave if they are getting more than one service or product from the company. The problems for suite customers are that quite often the new product isn’t best-of breed, the acquiring company has little prior in-depth understanding of the new product, and integration with existing products is slow and often poorly done.

This isn’t the only form of “customer crazy glue” that I detest. There are the customer loyalty programs in which you are urged to join, some of which have an annual fee. An example is those offered by airlines which rate passengers on miles flown to determine the different baseline of service they will give to a flyer. It reminds me a bit of the different passenger classes as portrayed on the Titanic in movies.

My least favorite “customer crazy glue” is the customer support offered by technology companies which are marketed so beautifully when you purchase the product. You soon find out this support is outsourced, that a charge is often incurred, and a good portion of the call, which takes numerous prompts and a long wait, is consumed with a pushy sales pitch for an additional product that you supposedly really need.

Perhaps I hate this “customer crazy glue” retention because I grew up working in my father’s store where a customer didn’t have any special ties encouraging them to come back. It was a time of “The customer is always right.” So when someone complained that a mop they purchased disintegrated on its first use we would replace it at no cost with a cotton mop and explain that disintegration probably occurred because they use used bleach and that wouldn’t happen with this, a cotton mop.

Customers aren’t always right but they also aren’t fools and they will become more aware of customer glue traps and how to avoid them. It will be interesting to watch the marketplace reaction to this.

© 2010
The above may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Thursday, October 7, 2010

Howard’s Inner Circle, No. 22: I Could Be …

On the whole according to Karen Schulz, “our indiscriminate enjoyment of being right is matched by an almost equally indiscriminate feeling that we are right.” She adds “If being right is succulent, being wrong runs a, narrow, unhappy gamut from nauseating to worse than death.”

This aversion for being wrong is perhaps why I found “Being Wrong—Adventures in the Margin of Error” by Kathryn Schulz so fascinating. First of all it is a subject that few fully understand, explore, or write about. Second, and most important, it is a professional journalist’s treatment of the subject. Ms. Schulz provides many well-documented examples that illustrate how being right and being wrong are interrelated in so many surprising ways and how significantly they impact our emotional and societal frameworks.

As to the individual, Schulz points out that “…[O}ur beliefs are in extricable from our identities. That’s one reason why being wrong can so easily wound our sense of self.” Regarding to the communities we live in, she points to a so-called disagreement deficit which supports what we think as being right. “First our communities expose us to disproportionate support for our own ideas. Second, they shield us from the disagreement of outsiders. Third they cause us to disregard whatever outside disagreement we do encounter. Finally, they quash the development of disagreement from within.” Schulz observes.

One of the questions that Schulz asks is: “Do we have an obligation to others to contemplate the possibility that we are wrong?”

Is she right?

© 2010
The above may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Friday, September 17, 2010

Howard’s Inner Circle, No. 21: Being Proactive When There is Uncertainty

A number of speakers at the UJA Federation of New York 41st Annual Sidney Kess New York Tax & Financial Planning Conference urged attorneys, CPAs, and financial planners attending to encourage their clients to review their wills. There was concern that the federal estate tax repeal for 2010 could have a devastating impact on the distribution of property if they died in 2010.

A particularly expressed concern were those wills with formula clauses that assumed the existence of an estate tax. Martin Shenkman with Martin M. Shenkman, P.C. in Teaneck, NJ indicated that relying upon a state-enacted stop-gap law that assumes an estate tax of a certain date for purposes of a formula clause might not work as it could result in the disposition not intended by the actual formula clause in the will.

I believe it was Daniel Daniels of Wiggin and Dana LLP in Stanford, Conn. who opined if a change in a will is needed, a deficient formula clause might be replaced with a bequest to a giant QTIP trust providing flexibility to deal postmortem with the estate tax uncertainty. This is especially true if the estate tax is imposed retroactively to individuals dying towards the end of 2010.

Shenkman also pointed out how the estate tax repeal discourages charitable bequests in a will since there is no estate tax charitable deduction to utilize. He offered a number of alternatives which would result in a deduction for income tax purposes. He also added that similar logic would apply upon reinstatement of an estate tax if the estate is under the estate tax exclusion amount.

Also in dealing with uncertainty, Steven Siegel of the Siegel Group in Morristown, NJ recommends including alternative dispositions when drafting, as this allows for the greater effective utilization of disclaimers to accomplish a desired result despite the uncertainty.

It is extremely unfortunate that the Congress that enacted the “Economic Growth and Tax Relief Reconciliation Act” and subsequent Congresses, especially and including this one, created and continue to perpetuate this uncertainty. In 2001, while I was editor-in- chief of Practical Accountant, I mentioned in a cover story on this subject that a practitioner observed tongue-in-cheek, “Some advisors are having clients sign a living will where the plug will get pulled five minutes before the end of 2010.” My fear is this Congress will take no action in 2010 and a plug might be pulled or someone might commit suicide just before 2010 ends so the death occurs before the estate tax is reinstated.
© 2010
The above may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Wednesday, August 25, 2010

Howard’s Inner Circle, No. 20: Seeking Clarity

Not having a job doesn’t mean you’re not working. Much of my efforts are focused on “staying in the present.” I’m finding that it is particularly difficult. So, as I often do, I turned to a self-help book. The right one is easy to find at a library, bookstore, or online by simply looking at some titles. Publishers of self-help books are adept at reeling you in that way.

Arriving in Your Own Door--108 Lessons in Mindfulness by Jon Kabat-Zinn is the one I picked to read and the following is helping me to stay in the present:

“When you are taking a shower, check and see if you are in the shower. You may already be at a meeting at work. Maybe the whole meeting is in the shower with you.”

“Our thoughts may have a degree of relevance and accuracy at times, but often they are at least somewhat distorted by our self-centered and self-serving inclinations, our ambitions, our aversions, and our overriding tendency to ignore or be deluded by both.”

““The intention would be to see things as they actually are, not as we would like them to be or fear them to be, or only what we are socially conditioned to see or feel.”

© 2010
The above may be reproduced in full if that fact is stated and Howard Wolosky at http://howardwolosky.blogspot.com is credited as the author.

Thursday, August 5, 2010

Howard’s Inner Circle, No. 19: Did You Ever Notice?

The older you get the more you understand that what is right is subjective.

If you tell someone to do many things at least one won’t be done, but if you ask only for only one thing, it will be done.

Lately popularity governs what is “news.”

Control shouldn’t always be gained, but is often better given up.

A blind spot is hard to see even when someone points it out to you.

Today we have almost unlimited tools to create and inhabit a manufactured reality.

How hard it is not to leave footprints?

Monday, July 19, 2010

Howard’s Inner Circle, No. 18: The Subjective Forms of Succession Planning

When I was editor-in-chief at Practical Accountant, I was always intrigued by succession planning at accounting firms.

It seemed to be missing at most small ones. Probably because most practitioners viewed the practices as totally identified with themselves and were busy attending to business. At best, a few had practice continuation agreements with other firms in the case of death or disability.

In the case of the medium-sized firms, especially where the founders were still in control, it seemed like there was an enforced belief that further succession planning wasn’t tolerated or needed. The founders assumed, when they retire shortly, the firm would last long enough to make the payouts under the partnership agreement.

The larger regional firms paid the most attention. I was impressed when there was a smooth transition and the managing partner handed the baton over to a named successor over a stated extended transition period. Then, there were the knockouts of the long-term managing partner closely identified with past successes but seen as an obstacle by rainmaking partners to a needed new direction. My favorite was where the very successful, political savvy managing partner closely guarded his or her power and so ensured he or she had no successor at the firm. Those firms often ended up being acquired by an even larger firm or consolidator.

Perhaps I was so intrigued because I didn’t really understand how subjective succession planning is. Rather than looking at it from the prospective of ensuring the future survival of a firm, my starting point should have been to better understand the individuals, the size of the firm, and the firm’s power players’ interests as they would more likely determine the favored succession plan.

© 2010
The above is from the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Friday, July 16, 2010

Howard’s Inner Circle, No. 17: Seeking Solutions

I loved doing mazes as a child and I thought I had an original approach to solving them. A couple of years ago I planned to use a maze as an opening exercise for conference attendees. After giving them time to solve the maze, I explained my theory which I had held onto for over forty years and no longer believe. You see, prior to my presentation, Justin, the art director of my company had looked at the maze and said the best way to solve that particular puzzle was neither from the start nor the finish, but to begin from the middle. He was right!

Monday, July 5, 2010

Howard’s Inner Circle, No. 16: Entries in My Black Book

Not sure all my readers know what a “little black book” is. Wiktionary defines the phase as “an address book, especially one in which the details of previous lovers are recorded.” Don’t think that applies to mine, a looseleaf binder with about 80 encased-in-plastic pages of quotes and paraphases from books I have read.

Periodically I reread my black book to see if what I captured still has value. Also, I revisit it when I feel out of kilter and want to achieve a better balance, or improve my interactions with others.

Here are five quotes that particularly caught my attention today:

“If I ask people what they think of me, they are usually polite. But if I ask them if they’d be willing to tell me what other people say about me, I give them the opportunity to say things without putting them in an awkward position of criticizing me to my face.”

“The word listen contains the same letters as the word silent for good reason.”

“You learn in life the only person you can correct and change is yourself.”

“The more innovative your ideas, the smaller the number of people who will understand it.”

“I know G-d will not give me anything I can’t handle. I just wish he didn’t trust me so much.

Maybe Wiktionary’s description as “an address book, especially one in which the details of previous lovers are recorded.” isn’t so far off. Without giving specific attribution, the five quotes are by Sam Horn, Katherine Hepburn, David Maister, Mother Teresa, and Harry Beckwith.

© 2010
The above is from the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Tuesday, June 22, 2010

Howard’s Inner Circle, No. 15: Dramatic Changes in Tax Planning

I met Dean Zerbe a number of years ago when he became National Director in alliantgroup's Washington, D.C. office. He was formerly a Senior Tax Counsel on the Senate Finance Committee. I took a liking to him immediately and was lucky enough to hear him speak last week at a Firm of the Future free breakfast hosted by Philip Whitman of Whitman Business Advisors and Robert Fligel of RF Resources.

Dean Zerbe understands intimately the dynamics of tax legislation and is especially attuned to the changing winds in Washington. I like that his free newsletter is only sent out when he has something important to say. Most importantly he pulls no punches when he describes the factors and the players that influence tax legislation.

There were some keys points he made that morning indicating to me that accounting firms should be making changes in their approach to tax planning, and in identifying which clients and potential clients are impacted by tax legislation.

Tax legislations’ increased industry focus.--It was particularly evident in the recent health reform legislation according to Zerbe that taxes were imposed on industries or a tax benefit was given to an industry. Take the therapeutic credit/grant which is a limited $1 billon program which ends once that amount is allocated. Interestingly if a qualified company picked by the IRS can’t use the credit it gets a grant. Zerbe points out the IRS form for applying was expected to come out momentarily and there is a very limited time to file. He expects future tax legislation to continue to focus on specific industries as that is easier than changing tax rates in general. Another example of this continued type of focus is a controversial proposal trying to increase payroll taxes for S corporations where shareholders are professionals.

Taking the penalty.—Zerbe expects more companies to pay the penalty for not proving medical insurance benefits as that will result in a greater savings than continuing to pay the benefits. He predicts taking the penalty as increasingly being viewed as a viable option in other situations.

Choosing to pay the estate tax for those dying in 2010.--Zerbe predicts one option that Congress might select is allowing certain estates of those deceased in 2010 subject to carryover basis to pay an estate tax instead and get a stepped-up basis for the property. If this option is adopted or the carryover basis rules are left alone, there are significant fiduciary obligations for these executors and administrators and planning opportunities for the disposal of property with a carryover basis with regard to heirs.

Watch out for tax whistleblowers—According to Zerbe, underpayment of tax whistle blowing is on the increase such as the reporting of companies taking advantage of promoted tax shelters. With downsizing, a move to independent contractors, and the informality of e-mails, it should come as no surprise that a disgruntled ex-employee might seek a reward from IRS. What is fascinating is the number of law firms who are specializing in this. Just do a search on the Internet.

Highlight costs of compliance-- CPAs and the organizations representing them need to put a greater effort in convincing Congress to calculate the costs of compliance when a tax law change is proposed suggests Zerbe. The figures could be included in Congressional reports the same way the revenue impact of specific law changes are displayed.

© 2010
The above is from the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Tuesday, June 1, 2010

Howard’s Inner Circle, No. 14: What is a Community?

Some might suggest a dictionary is the best place to find the definition of the word “community.” Others might point to the entry in Wikipedia. After reading, Wikipedia at http://en.wikipedia.org/wiki/Community, it is readily apparent that the definition depends upon the context in which you are using that word.

You no longer have to live in the same town, nor have direct personal and business contacts, or vote in the same local election to be part of a community. The Internet, e-mail, and other technologies have really broadened what constitutes a community and how many members can belong at any particular time. Also a member of a virtual community takes many forms including being an observer, a registered member, an active participant, and a community administrator. The form can change in an instant. Unlike geographic communities, there are often few ties (a job, home, family, etc.) which bind you tightly. You can simply leave that community and go to another if it doesn’t serve you well.

What do you look for in a virtual community? How about a mission statement you feel comfortable with, that the members believe in, and try to follow. Throw in a code of ethics and list of responsibilities for all its members and participants, including advertisers? How about transparency and full disclosure? And like some geographic communities, security, comfort, and diversity. Deep down a community that promotes the common good, while still encouraging, within reason, self-interest.

Much of business is obtained from referrals. In my experience, writing about CPA firms for many years, they were often the result of a CPA’s relationship building skills with clients and other professionals in the immediate geographic area. The problem is those geographic communities don’t have the stability they once had. Globalization, changing economic conditions, and technology are decimating some communities and creating new ones, often at a dizzying rate.

What communities you belong too is an important decision. In the past, it often revolved around the geographic location and great thought and due diligence would occur before joining a particular community. Because of the ready instant access and the need to participate within these virtual communities, I believe similar standards should be applied in selecting all the communities that we “live” in.

© 2010
The above is from the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Friday, May 14, 2010

Howard’s Inner Circle, No. 13: Two Diverging CPA Firm Business Models

Being a detached, independently paid and unpaid observer of CPA firms for over two decades allows me to freely comment.

The early successful business model was a firm with a number of rainmakers, often as little as two or three. They were great at business development especially via one-to-one contacts, and also adept at maintaining and working a tight referral network where referrals were expected to go both ways.

Over time, this well-established model has morphed itself into two new distinct business models. One is where those rainmakers have become the executive committee of a CPA firm that runs in a corporate style. Where previously, firm policies and strategies were hashed out in open discussion at partner meetings, decisions are now made at closed executive committee meetings. And no matter how it is sugar-coated, it is understood who are the powers-that-be, and how getting into the inner sanctum, the management committee, is only done by invitation or by a successful power play.

Contrast that with the second business model that also developed from the earlier rainmaker model. These are firms that strive to operate as a team with management building consensus and having a real understanding of the importance of the various individual’s contributions in the firm’s successes.

If I were to predict which of these two models will prove better, I would select the later. This modified team approach:
• Grooms successors;
• Encourages collaboration;
• Has greater multi-disciplinary capacities;
• Rewards innovation
• Promotes a firm-wide project management instead of a capture-what-you- kill mentality;
• Is more susceptible at building real working alliances;
• Taps well into intergenerational resources;
• Promotes widespread mentoring in both directions;
• Supports technology at all levels; and
• Is structured for everyone to be focused on their roles in business development.

In both models relationships remain the key, and referrals are still the main source of new business. The real difference is the lack of community in the corporate model. Although lip service might be given; it exists only in name and spin. The second model, the modified team approach, with a real manager rather than a CEO, truly promotes community. This approach will turn out better in the long run as all indications are technology, globalization, outsourcing and many other factors are permanently changing the rules of the game. Businesses and professional firms will be seeking to become members of various communities and will do so only by building trust and cultivating loyalty as the basis for relationships. Only one of these diverging CPA firm business models lives that.
© 2010
The above is from the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Thursday, May 6, 2010

Howard’s Inner Circle, No. 12: The Current Decrepit State of “Journalism”

One article entitled, “Ditching a $500,000 Salary to Teach Lit,” says it all. I found the article on Yahoo! Finance at http://finance.yahoo.com/career-work/article/109420/ditching-a-500000-salary-to-teach-lit?mod=career-worklife_balance. It was provided by CCNMoney.Com and written by a contributor.

What I expected as I read the title was a story about a difficult decision and how the transition went. The hope was to learn from this individual’s experience. I would have never read the article if the title, although a bit longer more accurately read “Ditching a $500,000 Salary and Selling Your Business at Age 50 for $6 Million to Teach Lit.” We can work at shortening my title if you want, but you get the idea. By the way, there were three bold faced tips in this short article on how he did it. They are 1. By Taking the First Good Offer; 2. By Investing Conservatively, and 3. By Drawing Down Cautiously.

This is the current state of “journalism.”

© 2010
The above is from the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Monday, May 3, 2010

Howard’s Inner Circle, No. 11: What Is the Best Book You Ever Read? Why?

I read a lot of self-help and business books and always get a few kernels of brilliance from them. However, the self-help books often bother me as many are constructed as workbooks filled with exercises and warnings if you don’t do the exercises you won’t get anything from the book. The business books are also heavy-handed, as authors after making one keen observation apply it in every context he or she can think of to prove its worth.

The most recent book I read was Paper Airplane by Michael McMillan mentioned by Tim Storey in Utmost Living. It was very good, but not my favorite. It tried to be too many things: a self-help book, a business book, and camouflaged with brilliant design work, also as a children’s book. In the end, it reminded me of my favorite book.

Tom and Pippo Make a Mess by Helen Oxenbury is hard to find as I believe it is out-of-print. I discovered this so-called child’s book at well over age 50, when it was brought to my attention by Alex’s father. He had been reading the book to Alex for many years (my guess at least eight). Alex, a remarkable young man, who has fought with tenacity since he was born at a birth weight of 21 ounces, loves the book, and often, after his father finishes reading it, rips up the book and makes a mess.

Every adult and child can benefit from its message whether as a gentle reminder or as a wake-up call. Unlike the many self-help and business books, Tom and Pippo Make a Mess has an ever so-light touch, and encourages the reader to think and reach his or her own conclusions. Equally important, the book’s message with Alex’s comment resonates louder the more times you read it or have it read to you.

What’s your favorite book? Why?
© 2010
The above is from the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Monday, April 26, 2010

Howard’s Inner Circle, No. 10: 2011 Accounting Cover Stories

For many years each month as editor-in-chief of Practical Accountant I decided on what would be the cover story. It wasn’t hard do but for one fact; we had to decide on the subject matter as much as a year and a half before the issue came out. The reason was the editorial calendar had to be in place in July of the preceding year and there was no guarantee that each month there would be a development affecting the accounting profession worthy of cover story coverage.

Because habits are hard to break I decided why not have some fun and pick out 12 possible 2011 cover story candidates now for a magazine for the accounting profession.

Tentative and Very Hypothetical 2011 Editorial Calendar
January--Plethora of Estate Tax Engagements
February--How CCH, RIA, Intuit, LexisNexis, and Others Are Utilizing CPA Firms as Business Partners
March--Reverse Mentoring: Overcoming a Firm Management’s Deep-Grained Aversion
April--Success Stories and Best Practices from Early Social Media Adopters
May--Increasing Revenue and Correctly Positioning a Firm During an Economic Downturn
June--CRM: What Firms and Clients Are Doing Wrong
July--Regionals Replacing Nationals as Auditors of Public Companies
August--Outsourcing Manufacturing and Distribution Functions
September--Walking the Cost-Cutting Walk: Fee Reductions on Modified Engagements Complement Advice
October--Tax Prep--Protecting Against Fee Erosion and Client Flight
November--The Practice Development Joint Ventures Art Form
December--Hidden Benefits of Firm Associations, State Societies, and Trade Groups
© 2010
The above is from the tenth issue of the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Friday, April 16, 2010

Howard’s Inner Circle, No. 9: Not So Fast with a Roth Conversion

If it sounds too good to be true, l have learned to pause and reflect. That is just how I feel about conversions of traditional IRAs to Roth IRAs. For some time there has been extensive positive press coverage regarding the fact that in 2010 the income restrictions have been lifted for a conversion and the resulting taxes can be paid over two years. Many of the articles are written as if it is a forgone conclusion that the election makes sense. I think the dangers and reasons why it might not pay to make a conversion must be more fully explored.

The fact that the participant should have adequate additional assets (other than using retirement plan distributions) to pay the tax and how the conversion affects the current tax rate is often mentioned in passing. What specifically isn’t being adequately explored is the immediate impact on an individual’s current and future net worth.

People who are eager to convert as much as possible must understand the taxes due on the conversion and on liquating assets to pay the tax on conversion can be very substantial. It would take a good deal of time to recoup that expenditure and achieve again the same compounding. That nest egg will take a very substantial hit.

Equally important, I see very few detailed projections using the comparisons of the tax impact of making or not making the conversion. Also missing are state tax implications which might include penalties for early distribution if the state doesn’t follow the federal rules on conversion, and the difference if the individual moves to another state. Assumptions also must be made as too whether there will be significant future changes to the income tax rules including the possibility of an excise tax being imposed on Roths of certain values.

Other major considerations are when the money might be needed, avoiding required minimum distributions, the ability to make controlled withdrawals at lower tax rates, as well as what happens if money is withdrawn within five years. The uncertain estate tax ramifications and estate planning implications especially as to possible distributions to heirs and charities also come into play. One article I read raised an interesting point as to whether a conversion to a Roth would more greatly expose the underlying assets if there is a subsequent divorce.

Also not sufficiently addressed is the mindset of the individual considering whether to make a conversion or not. Will they remain comfortable with the conversion if after they pay the taxes, the investment in the Roth goes down substantially or if economic adversity requires tapping into a Roth? How will that participant view the advisor who helped the participant make the Roth conversion? Although a conversion can be undone, the option is available for a very limited amount of time.

Assuming the decision is made that a Roth conversion pays particular care must be taken. For example, if institutions will be changed, make sure there is no tax withholding from the account when the transfer is done. Also it should be reviewed whether nondeductible IRA contributions were made.

Finally, an advisor should ensure that the participant fully understands and acknowledges all the possible ramifications of a conversion as the impact is substantial, immediate, and long lasting. Although the possible future benefits could greatly exceed the costs, the decision is a gamble, and as such, it should be a fully educated one.
© 2010
The above is from the ninth issue of the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Monday, March 15, 2010

Howard’s Inner Circle, No. 8: Big Four Shouldn’t Be “Too Big to Fail”

Early during the financial crisis, the phrase “too big to fail” received a lot of media play especially with regard to AIG. Similarly, a number of years ago following the demise of Andersen I got the distinct impression that the powers that be viewed the Big Four accounting firms also as “too big too fail,” probably a comfort to those Big Four firms. Rather than blaming the firm, the focus then became one of blaming individuals at the Big Four firms when certain undetected frauds and accounting irregularities came to light.

It will be very interesting to watch what happens regarding Ernst & Young, as the 2,200-page Lehman bankruptcy report by a court-appointed examiner puts E&Y in a very unfavorable light. Lawsuits can be expected but of more interest is what, if any, actions the PCAOB will take. Just as important is whether the PCAOB will publicly address the role that auditors played with regard to the financial crisis and what, if any, regulatory changes need to be made.

My belief is there has to be serious debate on whether the current way that auditors of public companies are employed should be changed. With the bulk of the audits being conducted by the Big Four and employment as an auditor subject to the decision of the executives of the company being audited, it should come as no surprise, auditors at the Big Four are very careful not to ruffle feathers.

In May of last year I urged the AICPA and CPAs to take the lead in closely reviewing and critically evaluating the way in which auditing of public companies is currently performed, beginning with the illusion of independence. See “Auditors: Doing the Right Thing?” at http://howardwolosky.blogspot.com/2009/05/auditors-doing-right-thing.html.

As long as the Big Four perform the overwhelming bulk of the audits of public companies, the marketplace and those firms are positioning those firms as too big to fail. That is great for those firms and their revenue especially if the government regulators are in agreement.

Unfortunately, as we saw with the financial crisis, those who were too big to fail actually profited greatly until the balloon burst and then they were bailed out with public dollars. Andersen wasn’t that lucky and I don’t believe that the any of the remaining Big Four should be.

As with those Wall Street firms, the Big Four has a special revenue-generating mindset. The problem is that this mindset has become quietly synonymous with the auditing of public companies and colors the auditing. The only way that this can be changed is if auditing public companies can be restructured so auditors are truly independent.

© 2010
The above is from the eighth issue of the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Tuesday, February 9, 2010

Howard’s Inner Circle, No. 7: Reducing the Divorce Rate of Accounting Firm Nuptials

I have always been intrigued by mergers and acquisitions of accounting firms. The initial exploratory discussions are usually described as “dating,” and if the parties are serious, a due diligence is conducted to see if a “marriage” will follow.” As with most courtships, the parties are on their best behavior and there seems to be a sort of tentative dancing so the parties get to know each other better and see if they’re truly compatible. You might even see some passion as one, or both firms, see their coming together as meeting a deep need that couldn’t be met otherwise. If there is a perceived dealbreaker, the parties go their separate ways and begin dating again with another firm, or swear off dating for a time.

I dislike the dating analogy--but if we’re going to use it, be forewarned that half of marriages end in divorce, and unlike what we read about messy divorces, we see very little about the messy firm demergers that occur or the exodus of incoming partners a few years after the two firms join. My guess is both are more prevalent than we expect and, of course, kept very quiet.

If I was giving advice to a firm that was “dating” another firm, in addition to discussing typical issues such as compensation, buyouts, equity, firm management, etc., I would advise the due diligence to focus significantly on compatibility, and the possible obstacles to, as well as, the details of integration.

I believe the most successful firms with regard to mergers and acquisitions are those that have the most experience with them, and therefore know quickly in discussion with firms if the deal should go forward. They are also very adept at, and understand, the importance of quickly integrating the two firms so the all the firm members have a common firm identity. Firms with less experience with mergers and acquisitions are usually successful because they really know the other firm well, and once they wanted to date, knew whom they wanted to ask.

The firms that don’t do well probably need to be a little more analytical and observant before jumping into marriage. I am not urging a longer courtship only searching for a deeper understanding of what their marriage is likely to be, and how a foundation for a solid marriage can be laid. It requires going beyond agreeing on terms and concentrating on the M&A process and the associated dynamics.

© 2010
The above is from the seventh issue of the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Tuesday, February 2, 2010

Howard's Inner Circle No. 7: A New Kind of Leadership

"A leader must be visionary and paint a compelling picture of the future. The leader has to articulate the vision and attract the kind of people needed to make it happen. To be effective, leaders must be respected and admired. Above all, they must be trusted. Your people must have confidence that, in difficult situations, you will do the right thing.” says Managing Partner Larry Unruh of Hein & Associates in Denver.

I used his quote in a recent presentation to the New York State Society of CPAs Large and Medium-Sized Firms Practice Management Committee on a new emrging style of leadership at a number of regional accounting firms. Although many of the leaders of these firms were rainmakers, they understand because of a constantly changing marketplace, increased competition, and expansion beyond compliance services, a firm had to stand out as providing value-added services and modify the rainmaker business model.

Referrals and personal relationships are still extremely important, but business development is now more of a firm-wide effort. These successful firm leaders also understand the importance in excelling at knowledge, change, risk, talent, and project management. They also recognize the increased need for strategic planning, transparency, application of best practices, a team mentality, the creation and maintenance of trust, consulting with futurists, ending of a book-of-business mentality, and greater non-CPA involvement.

A great firm begins and ends with the leadership. The other basic keys are a shared vision, an ability to promote and distinguish, and providing quality professional services. Too often I have seen firms in which a long-time managing partner molds the firm to reflect that individual’s style. That firm’s success is usually short-lived and ends soon after that managing partner retires. That is why this new style of leadership is so appealing. As these managing partners mold their style to the firm’s needs thus allowing for a smooth transition to the next managing partner and the firm’s continued flourishing.
© 2010
The above is from the seventh issue of the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Wednesday, January 20, 2010

Howard’s Inner Circle, No. 6: As Revenue Sources Dry Up, Experiment

In New York City there is a plethora of unused offices and underutilized event spaces which is resulting in a great deal of creativity. As to the empty offices, they are being rented out in a temporary, as-needed basis. The address is usually a prime one such as Midtown. The interesting thing is what is being rented out. You get the use of an office in a suite of offices under a plan such as one that offers office space for 12 hours a month. There is a receptionist to answer the telephone and welcome visitors, Internet access, a telephone number, and the ability to rent out conference rooms by the hour. You share the suite with a multitude of businesses and individuals.

Companies, especially those with salespersons, are renting out these offices as a cheap, cost-efficient way to have suitable locations for their representatives to meet clients. Consultants also take advantage of these rentals. Building owners are very happy as the office space would otherwise remain vacant.

With regard to event places, rather then relying on corporate parties etc., the event place owners are working out deals with networking groups. The bulk of their revenue doesn’t come from rental and catering, but from what is earned by selling drinks to the attendees. The events usually occur at off times such as Monday, Tuesday, or Wednesday. I was recently at a free rooftop networking event with great views of the Empire State and the Chrysler buildings. The idea is if the networking group can get a couple hundred of attendees, it will be well worth it for the event place owners. I am sure many of those owners are trolling sites like Meetup.com which contains lists of these networking groups.

These techniques and many others are successful in these tough economic times because suppliers understand it’s no longer business as usual and creative marketing and advertising aren’t the keys. The idea is to minimize expenses for potential customers while still meeting their basic needs. This requires creativity and a willingness to question a business model that might have worked very successfully for many years.
© 2010
The above is from the sixth issue of the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.

Tuesday, January 12, 2010

Howard’s Inner Circle, No. 5: Holistic vs. Silo Business Development

When I became editor-in-chief at Practical Accountant a decision was made that shaped the editorial coverage of the magazine for the many years that I was there. The decision was to primarily focus on regional accounting firms, not just those in the various large cities, but throughout the country.

The reasoning was they were reacting best to the significantly changing business climate. Yes, the managing partners and partners of these firms provided the leadership, but what was different from years past was that non-CPAs were playing increasingly more important roles at these firms.

That is why readers saw so many marketing directors on the covers of Practical Accountant. Because of the increased competition and the need to attract business beyond traditional tax and accounting engagements, firms relied on marketers to: develop brochures and other marketing materials, create and publicize a firm brand, formalize the proposal process, get client feedback, accumulate and analyze marketplace information, assist on niche development, focus on new client and staff attraction, create sophisticated client relationship management systems, and help design dynamic firm Web sites.

However in the last few years, I have noticed a disturbing trend, many seasoned and highly respected marketing directors are leaving some of these regional firms. These firms appear to view marketing primarily as a cost center and support operation and have decided that a lower-cost maintenance mode is possible since the primary work of those marketing directors is done.

I believe that is short-sighted and CPA-myopic.

Contrast these firms to others that view and groom marketers to become business developers. They often formally make the marketer a firm principal ensuring they play a key, direct role in executive decisions. I expect these firms will also be transforming their marketing operations as revenue centers advising some firm clients directly on marketing or acting as consultants and advisors to assist in the clients’ marketing decisions.

These enlightened firms understand that the CPA-rainmaker approach is no longer enough. They follow a team approach, work at firm buy-in, and follow firm governance procedures that ensure a more holistic, although still CPA-centric, approach to business development.
© 2010
The above is from the fifth issue of the newsletter, Howard’s Inner Circle, which periodically appears on the blog, “Instigator” at http://howardwolosky.blogspot.com/. It may be reproduced in full if that fact is stated and Howard Wolosky is credited as the author.