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Letters And the Correct Homonym Is… Oh, no! Not the JofA, too! Please see “Shifting the Burden of Proof” (JofA, Sept.99, page 89) and tell me how a CPA can “pour” over records for hours. I always thought I “poured” my martini after I got through “poring” over clients’ records. Pat Romine, CPA CFO, Yes—CPA, No My company, Black Diamond Equipment, Ltd., was generously spotlighted in “How Midsize Companies Are Buying ERP” (JofA, Sept.99, page 41), but I was mistakenly listed as a CPA, which I do not deserve. Due to the nature of your publication and organization, I thought it best to acknowledge this before I am accused of resume inflation. Clarke Kawakami FASB on Accounting for Contributions The news item, “FASB Provides New NPO Guidance” (JofA, Oct.99, page 13), is an excellent description of the rules on accounting for contributions made to one nonprofit organization and transferred to another—a transaction that affects a thousand or so organizations. Another contributions problem that affects many thousands of nonprofit organizations also should be considered. FASB Statement no. 117, Financial Statements of Not-for-Profit Organizations, requires all nonprofit organizations to publish a statement of activities that contains a column for “unrestricted” revenues and expenses. If the organization receives an endowment not explicitly restricted by the donor, that donation must be reported as unrestricted revenue. Some monetary contributions are so sizable they obviously are not intended for operating purposes. Other contributions resulting from a capital campaign, or consisting of museum objects, clearly are not intended to finance operating activities even though not explicitly restricted. Consequently, the statement of activities overstates operating income. An organization can report operating income, but only as a designated part of the unrestricted column, and there is no definition of “operating.” The statement-of-activities reports made by these organizations, therefore, are seriously misleading. Robert N. Anthony, Professor Another Look at ABC I believe the analysis in “Learning to Love ABC” (JofA, Aug.99, page 37) is flawed. The author shows a chart of accounts from a general ledger that summarizes various accounts, but neglects to mention most general ledger systems allow the accountant to expand the accounts to show direct costs by department, activity and other variables—not just by department. Therefore, the salary account in the general ledger could contain all the activity-based costs he shows in the chart. These direct costs are collected via timecards or computer entry. The main reason to use activity-based costing is to allocate the estimates of overhead costs that traditionally were allotted on a plant- or company-wide basis. The activity-based costs allow the accountant to allocate the overhead costs on a basis more in line with the overhead incurred by the activity. To arrive at a correct estimate to allocate overhead costs, the CPA must have input from the appropriate personnel. Without information from company insiders, the CPA will continue to stumble in implementing ABC. Benjamin F. Mathews, CPA Author’s reply: It is correct that time cards and other volumetric measures are essential to trace and segment how expenditures are uniquely consumed by work activities and eventually into products, service lines and customers. But the general ledger first recognizes the expense transaction, such as payroll itself. It is from the ledger balance that those expenses are assigned, using the required standard of measurement. This task is absorption costing, of which ABC is simply an advanced form. The first point of the article is that there is increasing acceptance that expense data should be transformed in a separate analytical tool, not in the general ledger. The second is that the accuracy of the final cost objects is much less sensitive to the timecard data and much more sensitive to the activity drivers and the entire network structure of the cost assignment system. I agree that input from cross-functional personnel is essential to continue properly tracing and transforming expenses into calculated costs. Gary Cokins Diversity or Discrimination Referring to the article, “Diversity Is Good for Business” (JofA, Sept.99, page 81)—if you hire someone based on race and/or ethnicity, are you discriminating against the person you did not hire for those reasons? Keith Frazier, CPA Human Diversity More Than Skin Color I agree generally that, as expressed in “Still Seeking the Ideal” (JofA, Sept.99, page 75) and “Diversity Is Good for Business” (JofA, Sept.99, page 81), there are benefits in diverse thinking among partners and staff members. However, the authors seemed to be using skin color as the sole measure of diversity. Surely there is more to obtaining the benefits of diverse thinking and diverse perspectives among accountants than merely seeking to obtain arbitrary percentages of minorities holding staff positions. Human differences in thinking and perspective are individual qualities, not racial qualities—the more we depart from honoring individual uniqueness, the more we move toward an arbitrary racial mix that substitutes skin color for real human diversity. There is no question that many minority, as well as nonminority, members of society need special encouragement and help in overcoming the difficulties they face in gaining an education and moving up in the economic community. However, it would seem fairer to all concerned to base assistance on individual need and promotion on merit rather than on the random element of ethnicity. William N. McNairn Fairness Opinions Revisited As managing director of a business valuation firm, I believe “Who Says It’s a Fair Deal” (JofA, Aug.99, page 44) gave a false and very dangerous impression to JofA readers about the risks of preparing fairness opinions. The author notes that, traditionally, investment bankers have written most fairness opinions, but “high fees and low risks” have attracted new competition—consultants and some CPA firms—giving the impression that these opinions have little risk. In reality, fairness opinions are very high risk for the firm preparing them, with the material possibility it could be sued by one or several parties to a transaction. The reason opinions cost as much as they do is partially to compensate for potential litigation costs and risks. The fine print of virtually every malpractice policy specifically excludes fairness opinions from coverage—in other words, “Get sued—no coverage.” The costs of one lawsuit alone could quickly wipe out the entire fee, not to mention one’s personal net worth. Also, the article may leave some readers with the impression that obtaining the AICPA’s ABV accreditation makes one competent to offer fairness opinion services. “Fairness” is a much more complicated concept than just “value” and includes complex legal and statutory concepts as well. The ABV accreditation enhances the skills of CPAs preparing business valuations, and I do not mean to knock it or those who hold it and have extensive experience in the business valuation field. However, the ABV requires “substantial experience” in only 10 valuation assignments and does not require a review of a candidate’s valuation reports in the accreditation process to ensure he or she is competently prepared. The ABV is certainly a worthy certification. However, the article might lead readers to believe the ABV by itself is sufficient, giving a false sense of security to those considering this service as a new business avenue. Many years of valuations and real world transaction experience are absolute prerequisites for venturing into the world of fairness opinions. Those who choose to go into the field should be aware of the very real risks. George B. Hawkins, ASA, CFA
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