The Jumpstart Our Business Startups (JOBS) Act was passed into law on April 5, 2012. It encourages private companies to complete IPO’s by giving them reporting relief if they qualify as an emerging growth company (EGC). EGCs have less than $1 billion in revenue and $700 million in publicly traded stock. A previous blog warned about this legislation eliminating the Sarbanes Oxley requirement of an auditor’s report on a company’s internal control over financial reporting. However, the Act does require management to report on such internal control. Nevertheless, it is now more likely that EGCs will have errors or issues with their financial statements heading into a public offering. This was the case in 2011, when the SEC examined Groupon’s financial statements heading into its November IPO. Groupon had already revised its financials twice before that date because of the SEC’s scrutiny, and is revising them again due to inadequate reserves for customer refunds. This news prompted a sell off and drop in share price from $20 to $15.27. AuditAnalytics.com recently conducted a study of companies with SOX issues since 2004, when the SOX requirement for internal control took effect. They identified 104 companies with SOX issues who would have been exempt from auditor scrutiny if the JOBS Act had been in effect at that time. For more information on the JOBS Act see the April 2012 edition of BDO Knows: The Jumpstart Our Business Startups Act.

An interesting quote from Al Ferrara, the national director of BDO’s Retail and Consumer Products practice, appeared recently in Women’s Wear Daily. For those of us that don’t read WWD, it is often referred to as “the fashion bible” and THE industry voice of authority. Al notes that “In the ‘new normal,’ full price doesn’t exist. People have come to understand no one buys anything at full price anymore.” The Retail and Consumer Products practice at BDO is highly regarded in the industry and it includes many household names as clients. It provides a myriad of accounting, tax and other financial services to clients ranging from multinational Fortune 500 corporations to entrepreneurial businesses. Because of its stature the practice is widely quoted in the media.  At Urish Popeck, we enjoy working with Al and appreciate the support the national practice offers to our retail and consumer products clients. 

With mixed news about the U.S. marketplace painting an uncertain picture of where the economy is headed, technologies companies are focusing on long-term goals, working to grow their bottom lines, acquire intellectual property assets, and increase headcount through strategic transactions.   BDO conducted its fifth annual survey of 100 chief financial officers at U.S. technology companies. Overall, the CFOs projected more modest 2.6 percent revenues than last year’s 10.4 percent rise. To raise funds, 55 percent of the CFOs would use public and private debt, the first time in the five year history of the survey that debt was chosen over private equity.   To read the rest of the BDO Technology Survey and review the other questions that were directed to the CFOs and their answers, please see the 2012 BDO Technology Outlook.

Among several other purposes, when the Dodd-Frank Act became law in 2010 it required public companies to comply with a number of disclosure and shareholder-voting provisions regarding their compensation practices, and gave the SEC the authority to make additional rules in furtherance of these requirements. The SEC adopted a number of new provisions effective in 2012 requiring consideration of risk that could be associated with any of an organization's compensation plans, as well as the solicitation of shareholder input on executive compensation practices. Those are: Say on Pay – a non-binding shareholder vote is required at least once every three years to approve the compensation of the executive offers Say on Pay Frequency – the SEC permits companies to solicit a non-binding vote on the frequency of shareholder Say on Pay votes (every one, two, or three years) Shareholder Disclosure and Approval of Golden Parachutes – the rules require an advisory shareholder vote related to all compensation arrangements with executive officers in connection with any merger, acquisition, consolidation, proposed sale, or other disposition of all or substantially all assets of the company What's ahead? Compensation committees should be aware that many additional regulations are expected to be developed during 2012 that will be implemented for 2013. Further analyses and disclosures (e.g., CEO pay compared with shareholder performance, CEO pay as a percentage of the "median" company employee (compensation, etc.) are in process and will require new and more in-depth examination and communication of executive pay practices.

  Dear Readers,  The most recent edition of Market Update from Global Wealth Consultants is available in its entirety on Urish Popeck’s web site. As with each Market Update, this edition includes facts, opinions, insights and findings on a variety factors impacting investment performance and our day to day lives. In this edition you will find the latest trends in innovation, geopolitics,  macro and microeconomics, and other domestic and international issues. I hope you will enjoy reading it as much as I enjoyed researching and writing it. Comments are welcome!   Best Regards, Mark Matos  

A recent U.S. Tax Court case (Estate of Liljestrand) reminds us that proper planning is essential when forming a Family Limited Partnerhship (FLP).  The Court included the FLP assets in the estate and hit the taxpayer for an additional $2.5 million in estate taxes.  The Court stated a number of structural problems in their opinion such as failure to keep proper books and records, commingling of personal and FLP funds, and lack of a proper valuation. You can find more detail on Estate of Liljestrand in Trusts & Estates. This case is just one more demonstration of the importance of careful planning  and due diligence when your family's succession plan is at stake.  Be sure to choose proven valuation and tax professionals that are well qualified to assist with the critical task of transferring wealth to the next generation.

The research firm PitchBook recently completed a national survey to develop a 2012 forecast for the Private Equity Industry. More than 100 senior executives at PE firms ranging to $72 billion in assets responded. The main takeaway according to the survey? Don't expect big increases in deal flow from the modest 2011 levels. A majority of private equity fund managers (70 percent) - regardless of fund size - expect to close only two or three deals during the next 12 months. This is a an increase from 2011, when 47 % of fund managers reported closing no new deals, and another 19% closed only one. While portfolios are in the black, individual companies continue to struggle - 22 percent of respondents indicated that more than 20 percent of their portfolio companies are currently performing below forecasts. But the trends are positive. The portfolio companies are rebounding, as funds continue to mitigate loses and bankruptcies decline.  While 11% of respondents reported declaring bankruptcy for one or more portfolio companies during the trailing 12 months, only three percent expect to do so in the coming year. And significantly, most respondents remain committed to their primary investment strategies. Only 7% have asked to change investment strategies and 11% are expected to do so within the next 12 months. The PitchBook survey was performed for BDO's Private Equity practice. For more details, please see this press release.  

My recent blog discussed the trend of the last several years of declining revisions of financial statements due to accounting errors or manipulations. As a member of the Accounting profession, I follow the activities of the PCAOB with interest (and often skepticism). Of particular relevance is their current slate of projects including mandatory auditor rotation, expanded audit reports and expanded roles for auditors beyond the traditional financial statements. As I focus on this, in view of the aforementioned decline in restatements, I tend to believe that we are going too far.   However, the unfolding story of Olympus and the depth and duration of the fraud perpetrated by their management paints a different picture.  The announcement that the PCAOB’s recent inspections of Big 4 firms have revealed numerous flaws in their audits is also pertinent   I am often tempted to think that the PCAOB should eventually go in to “maintenance” mode. In other words, they should allow the system to run as designed. Their actions should commence when audit failures transpire. Changes and remedies they put in place should be based on the findings from the investigations of such failures. That may ultimately prove to be naïve but at any rate now is not the time.

According to a recent survey by BDO USA, LLP, 82 percent of retail CFOs report they either increased (31%) or maintained (51%) inventory levels for the 2011 holiday season. However, they continue to be split over whether insufficient inventory (53%) or too much inventory (47%) poses a greater risk this holiday season, especially in response to cost inflation. Only 19 percent of retailers report cutting inventory as their primary response to rising costs. Instead, most retailers are passing cost increases onto consumers (35%) or improving supply chain management (35%). Despite increased costs and lukewarm holiday sales projections, retailers are eyeing growth opportunities in 2012. More than a quarter of CFOs (29%) say e-commerce and mobile commerce will be their primary objectives for growth in the next year, eclipsed only by improving merchandise assortments (39%). U.S. expansion (20%), M&A (7%) and global expansion (5%) are also seen as opportunities for growth in the upcoming year. "Retailers are relying on interesting product offerings and enhanced mobile and online shopping experiences to make the registers ring this season," said Al Ferrara, partner in the Retail and Consumer Products practice at BDO. "But unfortunately for shoppers, retailers ordered holiday inventory when raw material prices were at all-time highs. To preserve margins, there was no way to avoid passing along those cost increases to the consumer." These findings are from the fifth-annual BDO Retail Compass Survey of CFOs, which examined the opinions of 100 chief financial officers at leading retailers located throughout the country. The retailers in the study were among the largest in the country, including 10 percent of the top 100 based on annual sales revenue. The survey was conducted in August and September of 2011.         Other major findings of the 2011 BDO Retail Compass Survey of CFOs: Growth Expected in Mobile and Online Channels. Retailers overwhelmingly view mobile commerce as an opportunity (86%), as opposed to a threat (11%). With the rising popularity of comparison shopping and mobile apps, 100 percent of CFOs in the top 100 largest retailers expect to increase their mobile investment in the upcoming year. Overall, 54 percent of CFOs plan an increase in mobile commerce investment next year. Retailers are also more bullish on growth from their online sales channels. Nearly half of CFOs (49%) expect more than 10 percent growth this year, up 44 percent from 2010 projections (34%). On average, retailers expect revenue from online channels to grow by 11.9 percent in 2011. Potential Federal Tax Reform Causes Concern. Given Washington’s increasingly heated budget rhetoric, it’s not a surprise that the majority (58%) of CFOs say they are most concerned about a federal income tax aspect of a tax reform bill. CFOs also note concern over potential employee related tax (19%) and state income tax (11%) reforms. While 12 percent of CFOs cite Internet sales tax issues as their greatest tax reform worry, most (63%) do not expect Internet sales tax legislation to have a meaningful impact on their business. Products and Sourcing Costs are Greatest Threat to Margins. Drastic raw materials price increases have plagued the industry this year. As a result, many CFOs (43%) name products and sourcing costs as the greatest threat to their operating margins for the remainder of 2011, a notable 54 percent jump from 2010 (28%). Another 20 percent of CFOs specify store operating and administrative costs as their greatest concern, a drop from 2010 (38%). Threats from inventory levels and markdowns are also less of a concern this year (18%), down 38 percent from last year (29%), as are concerns about logistics and transportation (13%) and foreign exchange (7%). Asia Markets Improving the Most for Sourcing Opportunities. Similar to 2010, CFOs point to Asia as the region improving most in terms of sourcing (58%), even in the face of natural disasters and economic concerns. South America’s economy, led by Brazil, received increased attention this year. Sixteen percent of CFOs name it as the region with the most improved sourcing opportunities, a significant jump from 2010 (5%). Improvements in North America (13%), Europe (8%), Central America (3%) and Africa (1%) sourcing were also cited.

“There were 102,608 gifts given in 2008 against which valuation discounts were taken,” reports IRS economist Melissa J. Belvedere in the recent IRS publication 2008 Gifts, “and the dollar value of these discounts totaled $3.7 billion.” Of the 234,714 returns filed for Gift Year 2008, the majority of the returns were nontaxable. A grand total of $40.2 billion was transferred to 927,554 recipients. Family trusts were the most commonly used vehicle to make indirect gifts. While the total nontaxable gifts dropped to the lowest point in the last three years, taxable gifts increased for the third year in a row. An interesting note is that men gave less cash as gifts compared to women, while men gave more stock as gifts then women. The majority of discounts exceeded 40% of the reported fair market value of the gifts. According to Belvedere “approximately 43.6% of discounted assets were stock, while real estate made up 21.1% of discounted assets.” Remember, the statistics are for 2008 gifts, and the IRS’s posture towards these discounts for gifts in 2009 and later might be different given the current U.S. deficit woes. Most gifts were given directly (69.1%, $27.8 billion) to children or grandchildren (48.9% and 24.7%, respectively), while gifts to other relatives or organizations totaled just 11.3%. Cash made up the largest share of total gifts at 46.3% ($14.2 billion) for nontaxable returns and 53.3% ($5.1 billion) on taxable returns.