Letters

High Score for JofA
I’m not one to write letters to the editor—as a matter of fact, I can’t remember ever doing it. However, the JofA’s November issue was so packed with pertinent information that I wanted to take the time to write.

The article on potential refunds of payroll taxes for severance payments (“In the Money?” page 73) had to hit home to most readers in this day and age of corporate restructuring. I have already informed all my applicable clients of the potential refunds.

I also found the piece on business valuations (“A Good Deal Depends on Preparation” page 47) to be very helpful. I am not a certified valuation analyst, but from time to time I am asked to provide the internal resources to back up projections. This article, although at the 40,000 foot level, offered good practical tips and was an excellent source of business valuation resources.

Finally, I always read your Technology Q&A column, and as usual, there were a couple nuggets of helpful hints there.

Keep up the good work. This is the type of information that helps me help my clients maximize their bottom line while functioning as an outsourcing financial resource company.

Jack Livingston
Outsource CFO Specialist
cfoSOLUTIONSPlus
Buffalo, New York

Fairness of Taxes Called Into Question
Contrary to the letter, “An Opinion on Dividends’ Taxation” (JofA, Aug.03, page 13), an “honest study of the facts” does in fact prove double taxation of dividends. The real question is whether it is fair to tax corporate earnings and profits multiple times —once at the corporate level and again at the individual level upon distribution. The arguments presented in the letter do not alter reality.

In the universe of taxation, there are many subsets—for example, federal corporate income tax, state corporate income tax, federal individual income tax and state individual income tax. Likewise, corporate taxable income is a subset of corporate earnings and profits. By short definition, dividends generally are cash distributions of previously taxed earnings and profits. Therefore, to tax dividends at any level is to tax previously taxed income.

Regarding stockholders, to assert “they simply own a piece of paper that entitles them to a share of net assets on dissolution and to dividends if corporate management declares any” is simply to ignore the whole truth. Stockholders own a current, undivided interest in the net assets of the corporation. They also have, but are not limited to, the rights to vote for and replace the board of directors (management), to approve the auditors and to vote on other issues reserved solely to their discretion.

Frank L. King, CPA
Lakewood, Colorado

Income, Not Dividends, Double-Taxed
I read with interest “An Opinion on Dividends’ Taxation” and the claim that dividends are not double-taxed. While I agree the dividends are not double-taxed, the income, however, is.

The corporation pays tax on its earnings and then the stockholder pays tax when dividends are paid by the corporation (out of aftertax profits) and included as income in the stockholder’s tax return.

One other point: The corporation’s board of directors, not management, declares dividend amounts.

Richard P. Creagh, CPA
Brea, California

Myth of Double Taxation Is Politically Inspired
My compliments to the author of “An Opinion on Dividends’ Taxation” who stated that double taxation of dividends is a myth.

In addition to his logical presentation, corporate income is subject to the “art” of accountancy which is ofttimes elastic: Declared dividends are precise, exact and determined by the whim of corporate boards.

In the case of a corporation with a current deficit that declares a cash dividend, where is the double taxation?

The myth of double taxation—like other myths—is politically inspired.

Eli Mason, CPA
New York City

Audit Committees Take Time and Talent
The article, “CPAs as Audit Committee Members” (JofA, Sep.03, page 32) was very informative and useful. However, as a former audit partner with one of the larger international CPA firms for 29 years and currently the chairman of an audit committee, I believe there are certain overriding themes that need to be emphasized.

The main point I want to emphasize is that after the Enron, WorldCom and other financial debacles, this is not the time for CPAs to be timid and/or nonassertive. If they are going to serve on audit committees (and I believe this is desperately needed) let them do the job properly.

The accounting profession needs leadership. If a CPA joins an audit committee, he or she must be sure the organization’s audit committee charter adheres to his or her principles and matches the current standards for audit committees in light of Sarbanes-Oxley. Otherwise, the individual needs to obtain an up-front commitment that the charter can and will be changed. While there may be a few problems with the details, in my opinion, the spirit of the Sarbanes-Oxley legislation has some merit.

The article recommended reading the audit committee’s charter to determine the breadth of the scope with respect to time commitment. Several of the larger accounting firms have written model audit committee charters that are generally quite comprehensive. Upon examination, it is hard to argue with any of their contents and also fairly easy for a private company or a nonprofit organization to tailor the model charters. However, the implementation of such a charter on a day-to-day basis takes a lot of talent and a significant commitment of time. I believe the article was a little off on the required time commitment. To serve as the chairperson of an audit committee and/or the “financial expert” takes a lot of time and talent.

The financial community is in a crisis, or at least a perceived one, from a financial governance standpoint. It would serve this country well if all CPAs did their jobs properly in all respects, especially if they were going to be on an audit committee.

Thomas G. King, CPA
Darnestown, Maryland

Audit Committee Service Precautions
“CPAs as Audit Committee Members” does a very nice job outlining many issues prospective audit committee members need to address. For those thinking about audit committee service, it’s also important to consider what research tells us about key red flags for accounting trouble.

Studies have found that public company financial reporting fraud often is associated with weak boards of directors, weak audit committees, unethical CEOs, companies in volatile or complex industries—computer hardware and software, financial services and health care, for example—and smaller businesses.

I encourage prospective audit committee members to carefully evaluate the extent to which these factors are present, with particular focus on the independence, diligence and expertise of the current audit committee members and the CEO’s integrity.

If you are considering audit committee service in a higher-risk setting, then you need to ensure the directors and officers insurance policy and other protections will reduce your risk to an acceptable level.

Dana R. Hermanson
Professor of Accounting
Kennesaw State University
Kennesaw, Georgia

A Disappointed Reader
Sorry, I just don’t like nine pages of the JofA devoted to an “informal survey.” I’m considering starting up a public practice again after three years, and I was interested in seeing the article, “Users Rank Tax Software” (JofA, Oct.03, page 30).

Aren’t accountants supposed to be analytical, objective and interested in the facts? How does an “informal survey” meet these requirements? Isn’t this type of approach creating some of the great headlines (Enron and WorldCom, for example) that we’re seeing now? Instead of an “informal survey,” why didn’t the article just state “gut feeling”?

Well, that’s my feeling, and I am just a little (never mind, a lot) disappointed.

Fred “Rick” Harrison, CPA
Los Gatos, California

Article Should Be Directed to Partners
The article “To Your Health” (JofA, Sep.03, page 65) was informative. However, shouldn’t it be directed at the firms’ partners so they can assist their employees with surviving tax season in a healthy environment? As staff we are limited in the number of hours we have to do anything other than work. Yet nothing in the article was directed to the firm itself.

Our firm does provide us with fruit during tax season instead of just high calorie snacks, but I don’t believe the partners would appreciate our exercising in the office.

What I really want to know is this: Thirty years ago CPAs had to work 60 to 80 hours six days a week during tax season when everything was done by hand. Now we have tools to help us get the job done better and faster—computers, software and imaging, for example. It’s 2003 and we still are working 60 to 80 hours six days a week during tax season. Why? Maybe it’s time to rethink tax season not only in terms of eating right and exercising but why we have to continue this punishing schedule just because it’s the way it’s always been done.

Adele Bonar, CPA
Burlington, New Jersey

Costs Could Rise
The article “Tax Relief—Chapter 2003” (JofA, Oct.03, page 41) doesn’t mention the unfavorable impact that reducing dividend taxes is likely to have on corporate America’s overall risk-adjusted cost of funds (that is, the weighted average cost of capital). The cost of capital for many companies will increase for the following reasons:
First, since the cost of equity capital is typically several points higher than the cost of debt, increased returns to equity (higher aftertax dividends) will cause a greater portion of capital funding to shift to equity and thus raise the overall weighted average cost of capital.

Second, although increased returns to equity will reduce the cost of equity capital, nothing happens in the capital markets in isolation. If returns to equity increase, returns to debt also will have to increase to remain competitive, all other things remaining equal. Corporate borrowing costs will jump and this will negatively affect earnings, thus somewhat offsetting the decrease in the cost of equity caused by reduced taxes.

In summary, a higher cost of debt and a greater percentage of equity financing will likely more than offset a net decrease in the cost of equity and thus result in a higher weighted average cost of capital for corporate America.

Why is a higher cost of capital unfavorable? Most companies require investment projects to generate returns that meet or exceed the cost of capital rate. The higher the cost of capital, the fewer the projects that will be approved, thus causing a further slowdown in capital spending, one of the major problems of our current sluggish economy.

Paul M. Green, CPA
Cincinnati