CPE, Prosperity and the Public's Stake

In letters published in response to the December 1998 article, "CPE Is Broke: Let's Fix It," the points were made that only members of the profession would regard prosperity as an important reason for continuing professional education and that the public's stake in the continuing education of CPAs should be regarded as paramount (JofA, Mar.99, page 84).

What would happen to the public "stake" if practicing as a CPA was so financially unrewarding that members of the profession left in droves to do something else? I can't imagine that CPAs are so altruistic that they can ignore the fact that being paid is one of the reasons they are in business. Most of us enjoy our work and are rewarded by serving our clients, but how popular would our profession be with the new recruits we so badly need, or with existing practitioners, if it didn't pay?

I've never cared for the sound of the word "mandatory," either. We do not need more government regulation of CPE or anything else—what we do need is to educate our clients and the general public about what CPAs do and its significance. Then those with fewer skills and a less than ethical modus operandi would most likely find themselves out of work. A false sense of security—that the government and its laws are all the protection they require—is not what the users of our services need. They, as well as we, have a share of the responsibility.

Catherine M. Ditman, CPA
Cowpens, South Carolina

Taxes Ignored As Key Operating Information

In "Cutting Financial Reports Down to Size" (JofA, Mar.99, page 45), the author advocates presenting summary financial information that focuses on key indicators to help management. Based on my own experience in presenting financial information to nonfinancial executives, including board members, I think the article makes a valid point. However, by stopping at pretax net income, the examples in the article ignore taxes as key operating information. This, unfortunately, is a common oversight.

Corporate income taxes are frequently 30% to 45% of pretax net income. Other taxes, such as real and personal property, sales and use, payroll, excise and franchise, are almost always significant operating costs, but these taxes are often buried in other expense categories.

Taxes are important indicators for management, and many of them are controllable by a variety of planning and structural techniques, especially for multistate and multinational companies. Some of these techniques reduce the overall tax burden; others defer payment, effectively providing an interest-free loan to the company.

CPAs can play the lead role in identifying, suggesting and implementing tax-saving techniques. For most companies, summary financial reports should include taxes as key indicators.

Leonard Podolin, CPA
Philadelphia

Author's reply: The article was about trends and key indicators, not taxes. Many executives who are not CPAs find it difficult to read and understand financial statements. The focus was on the benefits of pre-distilling information for corporate executives to make it easier for them to see trends in expenses and to make use of key indicators as management tools.

Most members of a management team—for example, the vice-presidents of sales and manufacturing—are interested in how they can better manage their area of operation; GAAP statements just don't cut it for them.

Your comments about the importance of taxes are very appropriate. CFOs, corporate tax managers and CPA firms do a significant amount of tax planning, and it's very important. However, on a monthly basis, a management meeting to discuss results of operations is not a strategy session on tax planning—the absence of income tax expense on the key indicator statement was intentional. The objective is to enable individuals to focus on the areas they control operationally and to understand the big picture more easily.

The fact that key indicator statements and financial summaries are available does not mean that GAAP statements are not available or that tax planning is neglected.

Jack Ottenheimer, CPA
Baltimore

A Compliment

I found great value in your article, "Cutting Financial Reports Down to Size" (JofA, Mar.99, page 45).

Thanks for the practical advice. Keep it coming.

Bill Meduna, CPA
HunTel Systems, Inc.

Proposes "Double Flat Tax"

An economist turned tax expert and a CPA seeking simplicity came close to a fair "flat tax" plan for the state. However, after demonstrating that a constant, flat tax rate shifts more tax burden to lower incomes, giving the rich a bonanza, the designers made the same error others do—they included arbitrary income deductions in the construction of taxable income. Such provisions skew the rate of tax ultimately paid. Reintroduction of deductions for personal exemptions and different tax rates for singles and married people essentially scuttled the proposed plan.

Equality of taxes is imperative for fair taxation—a basic objective of a flat tax rate—as well as greater simplicity. To alleviate shifting the tax burden to lower income taxpayers, you must change the tax they pay. To do that, you must adopt a "double flat tax" plan, which actually nets a flat tax credit from a tax based on a flat rate. An equal tax credit is the key to preventing unwarranted shifting of the tax burden to lower incomes resulting from a flat rate and replaces the personal exemption deductions which presently cause unequal taxes themselves.

How much credit is appropriate? To start, use as a guide that in 1935 personal exemptions equaled the income and canceled the federal tax for an average family of four. Thus, 25% of the current tax would provide tax credits to cancel the taxes for an average family of four and match the 1935 model. By awarding tax credits of equal dollar amounts to every man, woman and child, you not only preserve equality of taxes, but also provide equal treatment to multiple dependents and eliminate differences in joint/single/separate rate classifications. Who can challenge the fairness of every individual's being allowed the same dollar flat tax credit to be applied against a tax computed at an identical flat tax rate applied to all income and all taxpayers?

Nevertheless, a flat tax rate is useless if applied to an arbitrary taxable income. A stable, equitable base for taxable income can be established if you abandon the Internal Revenue Code and state tax distortions, limit the taxable income to business transactions—salaries, pensions, interest and all businesses and investments—and then adopt generally accepted accounting principles (GAAP) as the basis for taxing income. Only minimal changes are needed for fair taxation. Example: Allow deduction of dividends, but don't allow deduction of any income taxes.

In summary, if you want a fair tax system and the economic benefits of time, talent and resources now being wasted on tax decisions that should be automatic, let the government set a flat tax rate less a flat tax credit sufficient to fund its programs, and let business design the rules for its own taxation.

Allen M. Hart, CPA
Chickasha, Oklahoma

Editor's note: In "Tax Pros Say Simplify the Code" (JofA, Mar.99, page 23), 41% of the respondents to an online survey called for radical change in the tax system. Implementing a flat tax was one of the actions they most wanted to see taken.n