CBT Q&A: Accountants share insights into local economic conditions

Five of Columbia’s leading accountants joined a CBT discussion of issues and trends in accounting and provided some insight into local business conditions. The participants are Jim Marberry of Marberry, Miller & Bales; Bob Gerding of Gerding, Korte & Chitwood; Jeff Echelmeier of Williams-Keepers, Clarence Jett and Tami Benus

CBT: Accountants have an inside look at how small business clients are faring during this economic downturn. In general, how would you describe the difficulties that businesses in the Columbia area are experiencing? In your personal opinion, do you think the local economy will rebound quickly or after an extended period of time?

Marberry: Columbia and Mid-Missouri always benefit from the medical, education and insurance industries that are not as profoundly affected by economic challenges as other industries. This mitigates our exposure to the current state of the overall economy. We are seeing some of our construction companies experience some layoffs and reduction in project backlogs. Some restaurants and retail stores are showing slightly lower sales as compared to the previous two years. Our medical and insurance clients appear to have operating results near normal expectations.

Gerding: The economic slowdown has had a significant impact on most businesses in central Missouri, causing a direct impact on the bottom line. Managing expenses has now become a critical process in order to return to profitability or even survive. Reductions in personnel, advertising, benefits and other overhead costs are important. The local economy can rebound, but in my opinion, it will be well into 2009 before any significant improvement can be achieved. Efforts to improve the economy by our city and the region are critical, and probably should be our number one priority.

Echelmeier: I do not believe that our local Columbia economy is recession-proof. But because it is so dependent on the benefits provided by the healthcare and higher education industries, it is less affected by negative trends than other communities around the state and the Midwest. I believe that our clients are certainly conscious of the economic downturn, specifically rising costs associated with fuel, supplies and other day-to-day necessities. Our clients are acting prudently in consideration of these conditions and are thinking more about the best use of their discretionary funds – maybe they have delayed a previously planned expansion or new equipment purchase – until conditions improve, which I believe will happen over time.

Jett: The majority of the businesses that we are assisting are experiencing a decline in the volume of business, especially in the construction and real estate industry.  These types of businesses are down from 15 percent to 20 percent compared to last year.  However, we have noted that the profits from the construction related businesses are down as much as 50 percent, which indicates much higher costs needed to generate the income. Businesses related to the automobile industry are down about 50 percent and are mainly showing a loss instead of a profit.  Businesses in the food industry are up 10 percent to 15 percent, while professional businesses are up 20 percent to 25 percent. This is especially true in the legal field. Our firm is of the opinion that the local economy will make a fast turn around, except for the construction industry, which will take longer.

Benus:  With my clients it is 50/50. About 50 percent are struggling and 50 percent are thriving. A lot has to do with how they have positioned themselves in the market, whether or not they have all their eggs in one basket. With the downturn in the economy, people are thinking harder about where to spend their money. This could be beneficial in that they are not wasting money. My clients are thinking twice before making purchases. They are asking whether they really need the items, whether a good used piece of equipment would do the job and whether they would be better off leasing instead of buying. My realtors for the most part are seeing a lot more sales. Several of my contractors are picking up more jobs.

CBT: How are the current economic conditions affecting what you do for clients in preparing financial statements? Are you seeing more scrutiny by lenders as credit tightens?

Marberry: We always attempt to prepare financial statements that will provide all users of the statements the necessary information to make decisions based upon the financial condition of the entity and its operating results. Current economic conditions do not change that objective. We are receiving more requests from lenders for financial statements and copies of income tax returns. That would probably mean that the lenders are attempting to document their loan files more carefully and therefore have more information to support the credit worthiness of the borrower.

Gerding: Businesses and their lenders now have an increased awareness of the need for timely and accurate financial statements. Lenders, as they should, need to be aware of potential cash flow and profitability difficulties of their customers early on so they can assist in solving financial problems along with their accountants. Open and honest communication from borrowers about their financial affairs with their lender is critical. Our job is to provide accurate financial statements so good decisions can be made.

Echelmeier: An accurate financial statement is an absolute necessity for all businesses, regardless of economic conditions. So, the downturn in the economy has not changed the emphasis we place on our clients’ preparation and maintenance of accurate financial statements. We have noticed that many loan transactions are not as heavily leveraged by bank financing as they have been previously and that banks are requiring business owners to invest more of their personal or business equity into projects that have been largely funded by loans in the past.

Jett: Our firm has prepared more pro forma statements this year than any time in the past. A pro forma is a statement estimating future income based on some criteria, usually the performance over a short prior period.  Some banks are asking for these when they are considering settling a loan below the current balance owed on the loan.  We have noted that banks are asking for financial statements more often and are asking for more years tax returns than in the past.  This is especially true for individuals getting personal loans.

Benus: As for clients trying to get a loan, yes, the financial institutions want more information. The banks want more collateral for loans. My contractors are finding the banks are not lending money for new development until the current developments are sold.

CBT: The IRS in June proposed new guidelines for penalties that can be imposed on tax return preparers. The guidelines broaden the definition of an income tax preparer and increase the monetary penalties. They also increase the threshold for estimating the chances of winning a potential dispute with the IRS – from 33 percent to more than 50 percent. Presuming they’re adopted, what will be the impact on accountants and their firms? Will it cause some tax preparations to take longer and thus be more expensive?

Marberry: The proposed regulations will not increase the time required to document and prepare the average individual or business tax return.  The possibility of a preparer penalty is not a significant consideration in 99 percent of the income tax reports.  We will be even more diligent in informing our clients of possible tax positions that may not have a” realistic possibility” of sustainability and we will also consider whether additional disclosure of our position to the Service is warranted. I believe we will receive more guidance from the Service as well as the AICPA on this topic in the near future.

Gerding: The CPA profession has always held its members to a high standard of conduct. This change should not cause the preparation to take more time and consequently fees should not increase as a result.

Echelmeier: If the proposed regulations are adopted, we believe that most tax returns will take no longer to prepare than they have in previous years. There is no doubt, however, that some taxpayers are involved in increasingly complex transactions and, in some instances, have even been enticed into some dubious tax schemes. Hopefully, they will seek advice from their tax consultants prior to entering into these transactions. But, if they do not seek that advice, the potential exists for the tax preparer to perform additional research necessary to either support a particular tax position on a return or to make additional required disclosures to the taxpayer or on the tax return. When these complex situations arise, the new documentation and disclosure requirements of these regulations might require additional time and effort on the part of the preparer.

Jett: Section 6694 of the Internal Revenue Code contains proposed regulations that provides for penalties for tax return preparers who do not follow the guidelines outlined in this code section.  It requires the tax return preparer to reasonably believe that the taxpayer’s position satisfies the “more likely than not” standard that the position will be favorable in tax court.  Previously both the tax return preparer and the taxpayer only had to believe that they had a 1 out of 3 chance of prevailing in tax court.  This disparity in the level of belief between the tax return preparer and the taxpayer will result in more conflicts between the preparers and their clients.  It will require the preparer to disclose their position even though the client does not want to do so.  This increase in belief, and the increase in preparer penalties, will require more time on the part of the tax return preparer, and therefore, will be more expensive for the taxpayer.

Benus: This is putting an extra burden on the tax professional. Due to the extra work, it is probable that the cost for the return will go up and the turn-around time will be longer.