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Accounting News Roundup: CECL, IRS Audits and Bad Quotes | 06.17.16


Yesterday, the FASB issued its anticipated new rule that requires banks to recognize loan losses sooner, setting aside more reserves. 

Departing from the current “incurred loss model,” which critics say substantially delayed reporting of credit losses, the new current expected credit loss (CECL) model “is taking away the threshold to booking your reserves, and as a result, your reserve gets booked on day one,” FASB member R. Harold Schroeder told CFO. “That is the big notable change that people are referring to as the ‘Day 1 Loss.’”

"CECL" is pronounced "see-SUHL" isn't that fun? The whole idea is that banks will no longer have to wait to record losses. Under current rules losses had to be "probable" which means "as much as 80% confident that a loss has occurred." Now, banks will use "historical experience, current conditions, and reasonable and supportable forecasts" and book the losses right away. This is no small matter and the rule's announcement got a fair amount of coverage. The FASB issued a cost and benefits discussion as well as a Q&A. The American Banking Association even put out a 10-minute video on it.

And it seems reasonable, I think. Banks have a lot of knowledge about their loans, what kind of conditions lead to losses and mountains of historical data. if technology continues to make tracking all this information easier, discounting the loans upfront should be easier too. Not everyone agrees, however. FASB members Lawrence Smith and James Kroeker dissented and Sandra Peters of the CFA Institute said, "We don’t think it reflects the economics of lending money."

IRS audits

I've never been audited, but I don't imagine it to be a pleasant experience. Don't get me wrong, I'm sure the IRS agents are nice enough, but they get to ask for things that you would never expect and documentation for decisions that took you a nanosecond to make. This is especially difficult for small businesses or sole proprietors who don't keep the best records.

Regardless, you might think that after going through their financial rectal exam, people would change their ways. Nope!

For those who dodge their taxes and get caught, the sting seems to fade fast. In the years right after an audit, taxpayers who had to make additional payments appeared to become a bit more compliant, but the effect diminished over time and disappeared entirely by Year 5, another study found.

“Any initial impact of the audit on compliance is short-lived,” the researchers concluded.

That doesn’t surprise Fred Daily, a Florida tax lawyer who specializes in audits and tax crimes.

“I’ve had people who got caught by the I.R.S. and got serious damage — hundreds of thousands of dollars of damage — and at first, they’re like people just out of jail: ‘I’m never going back again!’ A few years later, they’re right back to doing what they had done before,” he said. “People’s character doesn’t change.”

Funny thing — the IRS does a really poor job of keeping an eye on people:

“It’s really counterintuitive how they do not stay on some of these people and audit them year after year,” Mr. Daily said. “I’ve had people where, as we finish an audit, I’ve said, ‘This very likely isn’t the last time you will see the I.R.S.’ — and actually, it is.”

Bad quotes

It's Friday and I'm only a few days away from vacation so please indulge me a bit while I make a mountain out of molehill. In this forgettable article about Grant Thornton consolidating its DC-area offices is this irritating quote:

“We’ll be combining our area offices to create a more efficient footprint, but also the workplace of the future, a concept developed with input from Grant Thornton employees,” said Atlantic Coast Managing Partner Jamie Fowler.

Who talks like that? Is this what the PR team comes up with when they get high? I'm stating the obvious here, but one of the problems of modern business communication is littering people's speech with words and phrases that they would never use. No one says "efficient footprint" or the "workplace of the future" outside of bad copywriters.

It would be nice if accountants could get quoted in media without reinforcing their reputation as wooden forest creatures. On the other hand, if this is authentic, I'm a big a jerk store. The Walmart of jerk stores, in fact. But come on, let accountants talk like regular people.

Previously, on Going Concern…

Megan Lewczyk wrote about multi-factor authentication. And we welcomed public accounting's summer interns. In Open Items, a student wants opinions on EY vs PwC vs GT in the DC area.

In other news:

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