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Friday Footnotes: The ERC Problem; EY Double Dips; Stress Less in Public Accounting | 5.26.23

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Footnotes is a collection of stories from around the accounting profession curated by actual humans and published every Friday at 5pm Eastern. While you’re here, subscribe to our newsletter to get the week’s top stories in your inbox every Tuesday and Friday. Have a safe Memorial Day.

Long Read

How a Pandemic-Era Program Became a Magnet for Fraud [New York Times]
Amid the onset of the pandemic in 2020, as large swaths of the economy went into lockdown, Washington set up various programs to help keep businesses and their workers afloat. Among them was the Employee Retention Credit, a tax benefit that was created as part of the initial $2 trillion pandemic relief legislation. The program offered businesses thousands of dollars per employee if they could show that Covid-19 was hurting their bottom lines and that they were continuing to pay workers. The money was intended to be a lifeline for struggling companies. Instead, it has become a magnet for fraud, creating a cottage industry of firms that market themselves as tax credit specialists who can help clients — even those who don’t actually qualify for the money — reap huge refunds from the I.R.S. Although the public health emergency is over, taxpayers can continue to apply for the tax credit until 2025. That has fueled a run for the money and the proliferation of financial service providers, who often charge hefty upfront fees or take cuts of around 25 percent of any tax refund.

Big 4

EY cashes in on offset conflicts [Australian Financial Review]
EY made a tidy $200,000 completing an “independent” review of overseas carbon credit programs for the Climate Change Authority (CCA) last year, which found that US-based Verra and Gold Standard were the best offset providers globally. It neglected to mention, however, that it was raking in consulting dollars for its work with Verra on the side. It also failed to mention the question marks that surround almost 95 per cent of the US$1 billion in “rainforest offset credits” sold by the Washington-based company.

PwC to remove staff involved in Australia tax leak scandal from govt work [Reuters]
PricewaterhouseCoopers (PwC) has agreed to remove staff with links to the leak and use of confidential Australian tax plans from government work, a senior government official told an inquiry on Thursday. The accounting firm is embroiled in a national scandal over its use of confidential information about proposed tax laws to drum up business. The Australian Treasury referred the matter to police for a criminal investigation on Wednesday. Finance Department Secretary Jenny Wilkinson told a Senate committee that PwC had agreed to remove staff “directly involved and with knowledge” of the breach from current and future contracts until it wraps up an internal review in September. A PwC spokesperson declined to comment.

EY US reshuffles leadership following failure of spin-off plan [Financial Times]
EY’s US chair Julie Boland has reshuffled the firm’s leadership, elevating loyalists after winning a power struggle with the Big Four accounting firm’s global bosses that scuppered a plan to spin off its consulting arm. Under the revamp of the US firm’s leadership, John King, the head of EY’s US audit business and one of the major opponents of the spin-off, will be leaving the US executive committee, Boland told partners earlier this week. He will instead be a “strategic adviser” to the leadership, according to an internal memo seen by the Financial Times. Boland has appointed Marcelo Bartholo, who heads EY’s eastern region in the US, to be her deputy, and gave King’s job to Dante D’Egidio, chief of the audit business in the same region. Jay Persaud, vice-chair for risk management who has backed Project Everest, will leave the committee. The reshuffle goes into effect on July 1.

‘No joy’ in watching PwC tax leaks scandal: Deloitte leaders [Australian Financial Review]
Deloitte’s chief executive and chairman have described the PwC tax leaks scandal as “deeply troubling and disappointing” but said they took “no joy” in watching the reputation of PwC personnel “being tainted by the actions of a few”. In an email to partners sent on Friday morning, CEO Adam Powick and chairman Tom Imbesi reminded staff that trust in a professional services firm could be quickly lost when “behaviour is not founded on integrity. This episode provides a salutary reminder to us all of the fundamental importance of ethics and integrity in everything we do. It also highlights the criticality of concepts such as trust, humility and accountability,” the pair wrote in the email.

Big four consultancies win $1.4 billion a year in taxpayer-funded contracts [Sydney Morning Herald]
The big four consulting firms have increased their federal business by 400 per cent over a decade while donating steadily to the major political parties that shape big decisions on government projects. A new study of the consulting giants concludes that PwC is now the biggest donor of the group, giving $2.1 million to federal political parties from July 2012 to June 2022, and when KPMG ($1.1 million), EY ($565,000) and Deloitte ($572,000) are added to the tally, their combined donations have reached $4.3 million over a decade.

Audit

Bitcoin Miner Riot Dumps Auditor for ‘Big Four’ Accounting Firm [Blockworks]
Riot Platforms is looking to switch accounting firms as the landscape for crypto company auditors remains in flux. The bitcoin mining company “dismissed” its previous accounting firm Marcum on May 18, appointing Deloitte to take its place. Marcum had audited Riot’s consolidated financial statements for the fiscal years between 2018 and 2022. Deloitte is set to act as the mining company’s independent registered public accounting firm for 2023.

US banking failures: the role of big auditors in another financial crisis [The Conversation]
Atul K. Shah, Professor of Accounting and Finance at University of London writes:
Large auditing firms often work with a significant proportion of an industry. KPMG is believed to audit more US banks than any of the other big four accounting firms, for example. This gives an auditor a unique view of the risks and opportunities in an industry, as well as the stresses and strains in various parts of a market. So, in theory, auditors should be able to issue warnings – to regulators for example – about hidden or as-yet unidentified risks, as well as endemic false accounting. This would not only protect shareholders, employees and investors, but also society in general, from the collapse of a large company or an industry crisis.

AICPA Auditing Standards Board’s Work Plan Includes Potential Convergence Projects with International Standards [Thomson Reuters]
The AICPA’s Auditing Standards Board (ASB) is working on several standard-setting or research projects, according to its 2023 workplan, which was discussed during a meeting on May 16-17 in Nashville, Tennessee. And many of the projects are tied to the board’s goal to converge its standards—as much as possible—with those of the International Auditing and Assurance Standards Board (IAASB). While the board aims to publish proposals for comment or finalize standards during a specified quarter, the timing is just best estimates of how each project will progress.

UK Watchdog Looks to Improve Small Firms’ ‘Unacceptable’ Audits [Bloomberg Tax]
The UK’s accounting watchdog announced a program Thursday to improve standards at smaller auditing firms, after calling the quality of their work “unacceptable” in a December report. Under the “Scalebox initiative” the Financial Reporting Council will sample parts of the smaller firms’ audits for checks of quality control systems and corporate governance. The plan is aimed at the auditors of Public Interest Entities, which largely consist of FTSE-350 companies.

Work

Mitigating the Negative Impacts of Job-Related Stress [CPA Journal]
Although stress in public accounting is unavoidable, especially during the busy season, excessive amounts can be dysfunctional for both individual CPAs and their firms. Prolonged exposure to high levels of stress can lead to psychological symptoms of depression and anxiety. Stress-related illnesses can decrease performance, generate health problems for individuals, increase group health premiums for organizations, increase absenteeism, and increase turnover. CPA firms can proactively address these stress-related costs by recognizing the drivers of the stress and tailoring responses accordingly.

The Forever Labor Shortage [Insider]
“The labor shortage we’re dealing with today is likely to remain this way — and perhaps get even worse,” says Jay Denton, the chief analytics officer at LaborIQ, which provides salary analysis to employers. “It’s going to continue to be really hard to attract people and get them into new jobs.” We’re entering what is shaping up to be the Forever Labor Shortage.

The time has come to end pandemic-era oversharing at work [New York Post]
The phrase “bring your whole self to work” is a greeting-card message, not a recipe for professional success. Here’s the problem: The meaning has become muddled. During the height of the pandemic, many had no choice — we lived with work, and because of that, we got an authentic view of the lives of leadership and colleagues, whether we wanted to or not. Because of that shared experience, especially during “unprecedented times,” letting it all hang out became acceptable.

Tax

Showing ads on Netflix could chill communications tax collections [Avalara]
States and local jurisdictions are still adjusting to the way streaming services have cut into the tax revenues they had come to expect from cable television service providers. We’ve written about this often in recent years, as American states and Canadian provinces enacted new “Netflix taxes” on digital streaming services, or went to court in attempts to extend existing taxes to cover the new technology. Now, just as some of that seems to have been settled, changes in the industry and our broader economy are combining to bring streaming service revenues down, which means communications taxes that are attached to revenues from subscriptions are no longer going to bring in as much as governments anticipated.

A Black professor has long said what the IRS now admits: The tax system is biased [NBC News]
In a letter sent last week to the Senate Finance Committee, the IRS said Black taxpayers are far more likely to be audited than non-Black ones, exposing them to tax penalties. And in January, the Treasury Department revealed that a swath of tax breaks disproportionately benefit white people, leaving many Black people with hefty tax bills and little money left over. “We are deeply concerned by these findings and committed to doing the work to understand and address any disparate impact of the actions we take,” IRS commissioner Daniel Werfel wrote in a letter to Oregon Sen. Ron Wyden, the chairman of the Senate Finance Committee.

Practice

Bots emerge as cyber threat for accounting firms [Journal of Accountancy podcast]
Cybercriminals have started using bots to identify zero-day vulnerabilities in routers, servers, smartphones, Windows, web browsers, and antivirus software. Once the hackers discover a vulnerability, they send out their bots to exploit it in as many places as possible, with CPA firms and finance departments among the potential targets.

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