ACCOUNTING

Reg A+ Cap to Remain at $50 Million

The Securities and Exchange Commission refused to increase the $50 million offering cap for Regulation A+. Both Republican commissioners on the SEC were in favor of raising the cap, saying the relatively low amount that can be raised in such deals has depressed interest in the structure, which the SEC authorized in 2015 to ease access to capital for smaller companies.

“We should welcome the opportunity the statute affords us to take another look at Regulation A+ to ensure that it can become a valuable tool for American companies seeking to innovate and grow,” commissioners Michael Piwowar and Hester Peirce wrote in a letter published and reported by the Wall Street Journal.

Voting against the cap raise were Democratic commissioners Kara Stein and Robert Jackson Jr. Surprisingly, they were joined by Chairman Jay Clayton, a political independent appointed by the Trump administration, who has been an advocate of boosting the number of public companies.

“About 250 companies have filed with the SEC to sell stock under Regulation A+, which allows firms to raise a limited amount of capital with less disclosure to investors and less frequent reporting of their financial results. The SEC has allowed about 185 deals to go forward, and 80 firms have reported raising a total of $670 million,” reports the Journal.

 

Fuzzy Footnotes Not a Problem for Investors?

Vague footnotes appearing in public company financial statements stating what they’re paying in taxes does not detour investors.

That is the finding of a new academic study conducted by the universities of Auburn, Missouri-St. Louis, Virginia Commonwealth, and the Virginia Polytechnic Institute. The study appears in the spring issue of The Journal of the American Taxation Association, published by the American Accounting Association, and was just reported in Accounting Today.

“Since the tax footnote could be a useful source of information, investors may believe that decreased tax footnote readability hinders the tax authority’s ability to use the footnote as a ‘roadmap’ for audit purposes,” said the study. “Managers of firms with high levels of tax avoidance write less straightforward tax footnotes, and investors value these efforts to conceal tax planning from the tax authority,” according to the study.

Researchers analyzed tax footnotes from the annual financial reports of multinational companies in the S&P 1500. They utilized a standard linguistic index they said “captures readability or syntactic complexity as a function for syllables per word and words per sentence.” They then used Tobin’s Q, a measure of a company’s appeal to investors based on the ratio of market value to book value.

Researchers found that “among companies rated to be above-average tax tax avoiders, the biggest avoiders in this group saw a 12.4% boost in their Tobin’s Q compared to companies near the avoidance median, provided, that is, their tax footnotes were low in readability. On the other hand, if the tax footnotes were comparatively clear and straightforward, the investor premium enjoyed by top tax avoiders turns into a 3.4% discount. These results are consistent with investors preferring firms with relatively high tax avoidance to have less straightforward tax footnotes,” said the paper.

 

Securities Class-action Suits on the Rise

The annual report by Cornerstone Research found that securities class-action filings involving accounting-related allegations had reached a record high 165 last year, nearly twice the 88 filed in 2016. Although the number of accounting-related settlements increased to its highest number since 2010, the amount of those settlements fell substantially last year to $862.6 million, compared to $4.9 billion in 2016, according to the report.

Cornerstone found that the overall increase in accounting case filings was largely attributed to 107 “nontraditional” filings involving mergers and acquisitions. The traditional (non-M&A) filings declined from 64 in 2016 to 58 last year, though those involved larger firms as defendants.

“Relatively larger defendant issuers have been the subject of traditional accounting class-action filings in each of the past four years,” said Cornerstone Research vice president Elaine Harwood, who heads the firm’s accounting practice. “We have not seen class action filings against firms of this size since 2008.”

A positive noted, this is the third consecutive year that the number of traditional accounting case filings involving restatements fell.

 

Dodd-Frank Critic to Leave SEC

SEC Commissioner Michael Piwowar, a strong critic of post-crisis regulations, including the Dodd-Frank rules, has announced that he will step down on July 7 after serving five years on the five-person commission.

As acting SEC chairman after President Trump’s election, Piwowar ordered a stoppage of work on implementing the Dodd-Frank Act. During that time he also advocated abolishing rules that prevent most individuals from investing in startups and other private companies deemed to be too risky, contending that it wrongly reserved the best opportunities to venture capitalists and millionaires. Piwowar’s resignation brings the SEC down to only four members, one of whom, Kara Stein, remains in office though her term officially ended last year.

 

SEC Proposing Tougher Broker Standards

Though less restrictive than the Labor Department’s version of the “fiduciary rule” affecting retirement accounts, the Securities and Exchange Commission’s rule requires stockbrokers to act in the best interest of clients. Brokers would face more stringent restraints on conflicts that can bias investment advice.

The SEC’s rule, approved by a 4-1 vote, does not ban specific conflicts of interest, but requires brokers to disclose conflicts and try to minimize their impact. Voting against the proposal was Commissioner Kara Stein, who commented: “Despite the hype, today’s proposals fail to provide comprehensive reform or adequately enhance existing rules.”

The SEC proposal “reflects a multi-pronged effort to fill the gaps between investor expectations and legal requirements, increasing investor protection and the quality of advice while preserving investor access and investor choice,” remarked SEC Chairman Jay Clayton.

The SEC proposal does not create a new basis for investors to sue their brokers for violating the best-interest standard. Wall Street had revolted against the Labor Department’s rule because it allowed clients to sue brokers in class-action lawsuits. Under the SEC plan, investor complaints would continue to be decided in arbitration hearings by the industry-funded regulator, the Financial Industry Regulatory Authority.

The SEC proposal now will enter a 90 day public comment period and will require a final vote by the SEC – a vote without Commissioner Piwowar who will have stepped down in early July.

Private Companies Not Ready for New Standards

Although they have more time to comply than their public company brethren, a new survey found that private companies have not made much progress in adopting the revenue recognition and lease accounting standards.

The report by consulting firm MorganFranklin found that 63% of those surveyed have not made significant progress in implementing the new revenue recognition standard. Only 9% have completed adoption of the revenue recognition.

Public companies were required to adopt the new revenue recognition standard by the beginning of this year; private companies must implement it for reporting periods after December 15, 2018. There is a little more time for the new leasing standard. Public companies must adopt by the beginning of 2019, private companies have until 2020.

 

Attempt to Restore Worker Tax Deductions

Among the many effects of the Tax Cuts and Jobs Act, many deductions used by itemizers were eliminated while the standard deduction was doubled. Among those in the scrap pile where deductions for labor union dues and unreimbursed work expenses.

A group of Democrats have introduced the Tax Fairness for Workers Act which if passed would reinstate the deduction for unreimbursed employee expenses and make the deduction for union dues above-the-line so it would be available to all, even those who do not itemize.

 

A New IRS

In a rare bipartisan effort, there may be a major redesign coming to the Internal Revenue Service. Two years in the making, new legislation now being considered in Congress would turn the IRS into what House Ways and Means Chairman Kevin Brady called a “taxpayer-first” agency.

The legislation would create the requirement of an independent administrative appeals function by establishing within the IRS an “Internal Revenue Service Independent Office of Appeals,” to be headed by a “Chief of Appeals.”

Additionally, the legislation would:

  • Require the IRS to create a comprehensive customer service strategy, based on best practices from the private sector, and submit the plan to Congress.
    Require the IRS to maintain the Free File Program.
  • Ensure that taxpayers have access to the same information as the IRS during the dispute resolution process.
  • Require the IRS to submit to Congress a plan to redesign the structure of the agency to improve efficiency.
  • Enhance cybersecurity.
  • Ensure that the IRS sends notice to the actual taxpayer when conducting an audit before contacting friends, neighbors and clients.
  • Restructure IRS enforcement tools to ensure taxpayers do not have their assets seized without proper, timely and fair notice.
  • Change the head position at the agency from a commissioner to an administrator.

Source: Accounting Today

MONEY TALKS

(but sometimes it whistles)

Whistleblower Awards

Three whistleblowers will walk away with the largest monetary awards ever given by the Securities and Exchange Commission. The $83 million will be shared by three tipsters that assisted the SEC in reaching a $415 million settlement with Bank of America Corp., which represents the SEC’s second-largest against a Wall Street bank. In that 2016 settlement, BofA settled accusations that it misused customer cash and securities to generate profits.

Celebrity Hunt — Too busy to testify

Lawyers for Shawn Carter, known as Jay-Z, accused the SEC of engaging in a “celebrity hunt” by trying to compel their hip-hop client to testify in the agency’s probe of a firm that Jay-Z did business with more than a decade ago.

Since December 2015, the SEC has been investigating Iconix Brand Group Inc., whose brands include Candie’s and Joe Boxer, over its accounting practices. The retailer paid $200 million to acquire assets from Jay-Z’s Rocawear apparel brand in 2007, writing down the value of those assets by $169 million in March 2016 and another $34 million this year, reports Bloomberg.

The SEC is seeking Jay-Z’s testimony on the deal to investigate inconsistencies in Iconix’s reporting, and has issued two subpoenas for his testimony. Jay-Z failed to appear both times, resulting in the SEC filing an enforcement action in federal court.

According to his lawyers, the SEC has gone on a “celebrity hunt” by demanding the rapper submit to unlimited questioning, asserting that Jay-Z was willing to testify for a full day, but not “day-to-day until completed” as the SEC is seeking. The SEC’s request “is driven more by governmental fascination with celebrity and headlines than by any proper investigative purpose,” his lawyers contend.

After all, say his lawyers, “Mr. Carter (Jay-Z) will commence a global tour consisting of 45 shows on June 6, 2018. Suffice to say the professional and publicity demands on his time are enormous,” they wrote to the court.

QUOTABLES

Don’t be irreplaceable. If you can’t be replaced, you can’t be promoted.

Never test the depth of the water with both feet.

It is far more impressive when others discover your good qualities without your help.

DISCLAIMER:
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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