W5 Discussions
Discussion #1
Post governmental accounting issues related to your research topic.
Comment #1
Because of my selected research topic associated with auditing standards, governmental accounting issues related to my research topic is auditing over government programs. Generally accepted government auditing standards (GAGAS) used by a wide range of auditors who audit government agencies, entities that receive government awards, and other entities. Auditors subject to the GAGAS are following similar requirements as the auditors subject to the PCAOB and “should report on internal control and compliance with provisions of laws, regulations, contracts, or grant agreements regardless of whether they identify internal control deficiencies or instances of noncompliance” (GAO, 2018, p. 119).
If auditors detected or identified illegal acts or suspect noncompliance with provisions of laws, regulations, contracts, or grant agreements or fraud, they should consult with legal counsel or authorities about reporting such findings and how this reporting can compromise investigative or legal procedures. GAGAS provides that in certain situations, auditors should report noncompliance with laws and regulations (NOCLAR) to external parties, the relevant funding agency, or both.
In May 2017, GAO provided comments on the proposed interpretation entitled Responding to Non-Compliance with Laws and Regulations, which was prepared by the American Institute of Certified Public Accountants (AICPA). Some of GAO’s comments were in the response of AICPA standards regarding NOCLAR.
For example, AU-C 250.A28 provides that “a duty to notify parties outside the entity may exist. . . in compliance with requirements for the audits of entities that receive financial assistance from a government agency.” AU-C 250.A29 provides that “the auditor of a governmental entity may be required to report on compliance with laws, regulations, and provisions of contracts or grant agreements as part of the audit of the governmental entity’s financial statements (for example, in an audit conducted in accordance with Government Auditing Standards). The auditor also may be required to communicate instances of noncompliance to appropriate oversight bodies and funding agencies.” We suggest that the AICPA include guidance consistent with AU-C 250 and AT-C 205 to assist members in public practice in determining how to respond to NOCLAR and when to disclose NOCLAR to third parties in the government environment (GAO, 2017. p. 2).
In May 2015, GAO provided comments on Responding to Non-Compliance with Laws and Regulations to IESBA.
Paragraph 225.17 discusses addressing identified or possible NOCLAR with those charged with governance. The IESBA might consider whether, if the auditor determines that the NOCLAR is significant enough to warrant discussion with those charged with governance, responsible government officials should also be made aware of the NOCLAR. GAGAS address this principle with a requirement that NOCLAR significant enough to warrant the attention of those charged with governance be included in the auditor’s report.
Paragraph 225.27 provides some examples of circumstances under which the auditor might determine that disclosure of NOCLAR to an appropriate authority should be made in the public interest. The revised code could point out that, if the NOCLAR involves government funds, the threshold for such disclosure may be lowered significantly. In some cases, the use of even a small amount of government funds for an unallowable expenditure could be significant to stakeholders, whereas the same expenditure might generate little interest outside the government environment. Examples of expenditures of government funds that could be significant even in small amounts include expenditures for alcohol or some types of entertainment (IESBA, 2016, p. 5).
In both responses mentioned above, GAO suggested that in audits of government funds, documentation requirements related to NOCLAR “may be subject to inspection by government auditors” (GAO, 2017. p. 2). Also, auditors of government funds “would benefit from guidance on appropriate steps to take after becoming aware of possible or suspected noncompliance with the terms of contracts or grant agreements” (IESBA, 2016, p. 5).
Comment # 2
The tax provisions of the Tax Cuts and Jobs Act have a direct effect on the government and on governmental accounting issues. Governmental accounting deals with the transactions of a government, its income, and expenditures. This tax reform had a significant impact on the major sources of revenue of both the federal and state governments which include tax revenue from both individuals and corporations. The Congressional Budget Office Budget and Economic Outlook: 2020 to 2030 show that the government’s budget deficit in 2019 was $984 billion (CBO, 2020, p.7). This increase in the deficit is the result of the tax cuts and increased government spending. It was expected that for 2020 the federal deficit would reach $1,015 billion (CBO, 2020, p.5). However, due to the current situation with a global pandemic still going on it is likely that this amount will be much higher. It is explained that it is expected for the individual and corporate income tax receipts to increase in the next years due to the expiration of the provisions of the TCJA (CBO, 2020). This increase in income tax revenue could help in reducing the federal deficit, however, due to the continuous growth in government spending, the effect of the increase in revenues might be small in the reduction of the federal deficit.
It was expected for the TCJA to increase tax revenues of the government or at least pay for itself by producing enough growth to compensate for the tax cuts. It was expected for this reform to generate an increase in revenues through larger corporate profits that would result in an increase in wages and hours worked and greater investment returns (Gale & Krupkin, 2019). When comparing actual tax revenues of 2018 with predicted revenues for that same year assuming that this reform was not passed, it was observed that the passing of the act reduced individual income tax revenue by 5.4% and corporate income tax revenue by 39.7% from the projected amount (Gale & Krupkin, 2019). Additionally, it was found that the actual amount of revenue collected in 2018 was $275 billion less than what was projected by the Congressional Budget Office (CBO) (Gale & Krupkin, 2019, para.4). If the TCJA does not have the impact that was expected to have on corporations and the overall economy, it is unlikely that it will be able to pay for itself as the tax revenues seem to continue decreasing. The large effect that the pandemic is having on the economy will also contribute to the decrease in tax revenues.
The revenues of state and local governments have also been affected. The growth in tax revenue of state and local taxes began falling at the end of 2018 and was attributable to the impact of the TCJA (Dadayan, 2019). In 2019, state personal income tax revenues fell by 3.7%, and corporate income tax increased by 20.2% but it is stated that corporate tax revenues are a small portion of state budgets (Dadayan, 2019, para.3). The overall growth of tax revenue of states for the first months of 2019 was only 1.5% when compared to 2018 (Dadayan, 2019, para.3). Although state and local governments are still able to generate tax revenues the growth on these revenues was not as expected or forecasted. The growth of this revenue is also heavily impacted by the economic growth of the country which seems to be slowing down and has been heavily affected this year.
Discussion# 2
Find a minimum of two peer-reviewed publications about ethical issues and forensic accounting (e.g., tax fraud, financial reporting fraud) that you can relate to your research project topic. Briefly summarize each publication plus have a sentence or two as to how the publication does or could impact your research project paper topic. Attach copies of the publications that you use for this discussion.
Comment # 1
Changes in tax law such as those brought by the Tax Cuts and Jobs Act always bring challenges for forensic accountants in their effort to detect fraud. Forensic accountants and auditors need to familiarize themselves with the changes to existing laws and new laws while fraudsters use these to find new ways to carry out fraud. The article A new tax code means new fraud challenges for auditors, addresses different areas of concern resulting from the changes of the TCJA. It is explained that changes in deductions and exceptions, changes in alternative minimum tax rules, provisions for offshore income, and consolidation of tax brackets can be used by fraudsters to carry out tax evasion (Pianko, 2018). These areas and many others affected by the provisions of the TCJA should be closely examined by forensic accountants in an effort to detect fraud. Fraudsters might want to take advantage of the lack of experience of the accounting and fraud professionals when it comes to the application of the provisions of this tax reform.
The article The GOP tax bill will make life easier for tax cheats. Here’s how, addresses the lack of provisions to discourage fraud on the TCJA. Whistleblower protection is very important for the detection and deterrence of fraud. A large number of fraud cases are discovered and investigated due to leads provided by whistleblowers. The Tax Cuts and Jobs Act originally contained two reforms that encouraged whistleblowing. However, it is explained that none of these provisions were included on the House-Senate conference version of the legislation that was approved (Kohn, 2017). The current Internal Revenue Service whistleblower law only rewards whistleblowers when tax revenue is recovered by the government but not for criminal tax cases (Kohn, 2017). One of the provisions that was cut from the TCJA amended this law by ensuring that criminal tax frauds were covered encouraging whistleblowers by providing rewards to them in these cases too (Kohn, 2017). The inclusion of these laws in the final version of this act could have contributed to the fight against fraud. However, since the TCJA did not amend any of the existent loopholes of whistleblower protection laws, tax evaders and other fraudsters are encouraged to continue to carry out fraudulent activities with less fear from whistleblowers.
A code of ethics is important for businesses to prevent members from carrying fraudulent activities. A well-established code of ethics can serve as a guide for the members of an organization in determining what actions or decisions are considered ethical and correct. Professionals that deal with taxes and tax provisions must also follow a code of ethics. The AICPA established the AICPA Code of Professional Conduct, “to provide guidance and rules to all members in the performance of their professional responsibilities” (AICPA, 2014, p.1). Accounting professional in that deal with tax accounting must make use of this code of ethics to guide their actions and avoid issues in the future. Accounting professionals that also deal with forensic accounting issues must also follow the code of ethics established by the Association of Certified Fraud Examiners.
Comment # 2
I bring to discussion two publications that combine ethical issues and forensic accounting. The first publication is PWC’s response to IESBA Exposure Draft – Responding to Non-Compliance with Laws and Regulations (NOCLAR). The response contains principal comments and detailed comments. Detailed comments include PWS’s concerns about how the revised proposal will impact forensic services. The proposed draft stated that disclosure of a matter is required outside the client is whether the legal privilege exists. But auditors concerned if the nature of forensic engagement would preclude disclosure to be effective. If forensic service is not explicitly exempted, auditors remain concerned that companies will be dissuaded from hiring professional accountants to perform forensic work. PWC recommended, “that the code explicitly clarifies that a professional accountant providing forensic services would report their findings to management or those charged with governance only and would not need to consider further reporting to parties external to the client” (PWC, 2015, p. 2).
The second publication is IESBA’s staff questions and answers regarding Responding to Non-Compliance with Laws and Regulations. One of the questions was regarding forensic engagements – if the accountant becomes aware of NOCLAR or suspected NOCLAR during the engagement, would the accountant need to apply the full response process under Section 360 of the IESBA’s Code of Ethics? The answer is no due to the purpose of the engagement. “However, the Code does not preclude the possibility that disclosure of the matter to an appropriate authority by the PA might be an appropriate course of further action in the public interest” (IESBA, 2019, p. 16).
Two of the discussed above publications are related to my research topic because of both explained the ethical issues in forensic services regarding NOCLAR.