Accounting News Roundup: Double Taxation and Do CFOs Need Accounting Backgrounds? | 05.19.16

CFOs and accounting

There's a nice little back and forth about whether CFOs need a strong background in accounting over at CFO that's worth anyone's time who has those aspirations. Here's one point:

The most visionary software engineers could not have launched their world-changing companies without a deep understanding of computer languages. The architects whose buildings define the skylines of the world’s greatest cities couldn’t have built them without intimate knowledge of the load-bearing properties of glass and stone.

And, the CFOs who have masterminded edge-of-your-seat business turnarounds or found efficiencies that transformed their companies — they could not have done those things without a rock-solid foundation in accounting.

Or if you're into the whole brevity thing:

Hell yes. They not only should, they must.

The right response, I think, is this one:

[W]hat constitutes an optimal CFO depends on timing. A CPA with an MBA who came up through the accounting ranks in the late 1990s and early 2000s generally would have been overlooked as a CFO candidate. Back then, companies wanted a controller-type CFO, someone who could close the books and serve as a strong audit committee chair on the board.

A few years hence, this need lessened and the recruitment priority shifted to people with strategic and business experience. It remains to be seen whether, because of the new revenue recognition rules, the pendulum will swing back toward accounting skills.

"Accounting knowledge is more important than accounting experience," which sounds pretty spot-on, too. In the mid and late 2000s, I think the prevailing wisdom was that big time CFOs needed to know Sarbanes-Oxley inside and out. These days, that's all handled by the controller or a Chief Accounting Officer. CFOs are being pulled in a lot of different directions now, including into operations and in some cases, the CEO's backup. Really, it's all depends on the whims of the particular business and I suppose that's what makes being a CFO fun (or incredibly stressful).    

Double taxation

One of the least attractive things about corporations is the concept of double taxation. That is, a corporation pays taxes on its income, but its shareholders also pay taxes on any dividends they receive. However, a new study from the Tax Policy Center found that 75% of corporate shares are now held by "tax-exempt and tax-preferred entities" so it seems taxing dividends doesn't accomplish a whole lot. Richard Rubin reports that Senator Orrin Hatch (R-UT) is releasing a plan that would try to tidy things up:  

Sen. Hatch’s plan would let companies deduct dividends, lowering their effective corporate tax rate as a backdoor way to reduce the U.S.’s world-high top statutory tax rate of 35%. Individual taxable shareholders’ dividends would be taxed as ordinary income instead of at lower capital-gains rates. Those taxes would be directly withheld by companies when they pay dividends to investors.

“It’s a huge mistake to locate the high tax at the corporate level and the low tax or the zero tax at the shareholder level,” Michael Graetz, a law professor at Columbia University, said at a congressional hearing this week. “We’ve got the tax in exactly the wrong place.”

Sounds like a good plan, right? The problem is that it's an election year, which gives Congress the added excuse to be even less productive than usual. It's also problematic because lots of people and businesses have already structured their tax planning to avoid double taxation. If we were to get rid of it, that screws everything up!

Any big change would disrupt businesses and shareholders that enjoy tax advantages now. Beyond that, a plan that lowers corporations’ effective tax rates and places the burden elsewhere will be hard to sell publicly.

“The politics of this are just unbelievably daunting,” says a PwC guy. That kinda goes without saying, but in this case, the comment is warranted.

Non-GAAP worries

On Tuesday, the SEC released "Compliance & Disclosure Interpretations" on the use of non-GAAP metrics. They attempt to explain when and how companies might be focusing a little too much on non-GAAP reporting and what action they should take to curb their non-GAAP enthusiasm. Yesterday, the Commission went on the PR offensive and we can all look forward to more worrying about non-GAAP accounting measures:

“We are sending a message and we are going to continue talking about it,” said Mark Kronforst, chief accountant of the SEC’s corporation-finance division. There will be “an uptick” soon in the number of SEC comments to companies, he said, as concerns have mounted that non-GAAP metrics could mislead investors and the commission has devoted more attention to them.

“I think this next quarter will be a great opportunity for companies to self-correct,” Mr. Kronforst said, speaking at a meeting of an advisory group to the Public Company Accounting Oversight Board.

This National Law Review post has a nice rundown of the new SEC's CDIs if you can't get enough of this stuff. But from the sounds of things, the SEC isn't giving any of us a choice. 

Previously, on Going Concern…

I wrote about layoffs in Texas. And in Open Items, someone's considering the public accounting boomerang.

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