Letters

Day Trading Debate Continues

After noting the inconsistencies between two articles in the JofA, Oct.00, “Paying the Piper: Some Tax Rules for Day Traders” (page 115) and “Being a Trader in Securities” (page 118), I read with interest the clarification “Day Trading and Self-Employment Taxes” (JofA, Jan.01, page 80).

While researching the topic, I identified IRS guidance that appears to contradict the perspectives presented in the clarification. The URL for this guidance is www.irs.gov/plain/forms_pubs/pubs/p5500409.htm.

Wesley N. Cooper
Weatogue, Connecticut

More on Day Trading

I believe I can offer a very clear and concise method the courts could take in the day trading arena (“Day Trading and Self-Employment Taxes” [JofA, Jan.01, page 80]).

Since the primary question is what constitutes a trade or business, that determination could be made based on whether one holds a securities license.

Before the advent of day trading, the only “real” traders were brokers or dealers in securities. In addition to meeting various state requirements, those individuals qualified under either NYSE or NASD rules to become licensed. The modern-day traders meet no such requirements because they do not deal with the public. I think this distinction alone can determine whether the activity constitutes a trade or business, or is an investment activity.

Unless a distinction is made along some similar line, numerous court cases could be decided on either side of the argument for years to come.

Dale Schwartzenhauer
Jim Johnson & Co.
Walla Walla, Washington

Editors’ Note: For more on this subject, see “Day Trader Dj Vu,” page 71.

Auditing Employee Benefit Plans—Another Factor

“ERISA Liability for CPAs” (JofA, Dec.00, page 39) pointed out the delicate issues surrounding employee benefit plans. However, the article did not mention one potential problem area our firm has encountered in auditing such plans—companies’ use of third-party administrators (TPAs).

TPAs handle the day-to-day transactions and final plan-year valuation of participant accounts. In many cases the leading cause of erroneous participant account valuation and reporting is poor communication between plan administrators and TPAs.

To compound the problem, TPAs usually provide services to several plans. Since no two employee benefit plans’ provisions are exactly the same, software packages allow flexibility in changing options or flags to conform to the provisions of any adoption agreement. Any auditor who has audited such plans can attest that if the options selected on the application do not conform to the plan’s adoption agreement, there will be erroneous participant accounts. For example, a plan’s employer contribution and/or forfeiture allocations may depend on an entire participant pool, so one error may cause all participants’ accounts to be wrong. To make matters stickier, terminated employees already may have received their exit distributions based on an erroneous employee account valuation.

The complexity of plans usually requires periodic monitoring by experienced plan administrators to discover such errors. Typically, the plan administrator is the company president or CFO—who may not be readily available for such close monitoring.

When auditing such plans, auditors should take an extremely skeptical approach and become very familiar with the content and flow of payroll data provided to the TPA, the provisions of the plan and what the TPA ultimately reported at the end of each plan year.

Ben Pea, CPA
Burton, McCumber & Cortez, LLP
McAllen, Texas

The Value of Tax Practice Peer Reviews

I believe fellow tax practitioners need to take a close look at their own practices and that all CPAs should take to heart “Tax Practice Reviews” (JofA, Dec.00, page 88).

The article pointed out some important benefits of the tax practice review but did not highlight the biggest and best: A tax practice review by talented reviewers could reap significant future revenues for the firm.

The reviewers could provide an honest evaluation of your tax practice, recommend quality control and procedures improvements and offer ideas to expand it. In my opinion, an effective client service plan could increase tax practice revenues by 50%, but as practitioners we may need an experienced CPA to guide us.

The accounting and auditing practices have been peer reviewed for years, but tax peer reviews are voluntary. I urge fellow practitioners to sign up for them. The valuable ideas derived from a review will significantly outweigh the costs!

Leonard Weitz, CPA
Managing Partner
Mann Weitz & Associates LLC
Deerfield, Illinois

You Read About It First in the JofA

The recently issued SAS no. 93, Omnibus Statement on Auditing Standards—2000 (JofA, Jan.01, pages 14 and 116), specifies the auditor’s report should indicate which country’s accounting principles and auditing standards were used to prepare the financial statements and audit them.

This reference to the country of origin will now be required primarily because the Internet has made audited financial statements easily accessible throughout the world.

The JofA issued what may have been the first call for this change in the audit report. In “Global Auditing and Accounting Confusion” (JofA, Sept. 97, page 89), the authors argued that the combination of increased globalization and Internet use made clear GAAP and GAAS labeling essential. The article also made the point that companies whose financial statements carry the US-GAAP and US-GAAS “brand names” send a “world-class reporting” message to potential investors.

It’s good to see that the JofA’s articles are sensitive to information age developments.

Stanley W. Davis, CPA
Chair and Professor of Accounting and Finance
Indiana University–Purdue (Fort Wayne)
Fort Wayne, Indiana