by Dr. Sean Stein Smith, CPA, and Stephen McCarthy, CPA – November 30, 2018 At this point, you have heard quite a bit about blockchain technology and have seen or participated in one of the dozens of webinars, presentations, or conferences focusing on this topic. Blockchain is a potential game changer for virtually every aspect of the profession, driven by the concepts of decentralization, consensus-based verification of data, the immutability of data once it is added to the blockchain, and the (up to now at least) unhackable encryption used to secure the information. Blockchain is an underlying digital foundation that supports these and other advanced applications. Despite of all the excitement about this new technology, there continues to be a wide gap between inspiration and installation. That said, what action steps or plans exist to understand and implement blockchain applications? Start by using a project management approach, like the agile methodology: brainstorm, design, develop, use quality assurance and deploy. Framed within the agile methodology, we will break down what can seem like an intimidating and overwhelming topic — blockchain implementation. Brainstorm Begin with the end in mind. Like strategic planning, define a process that needs improvement and then work backward to determine the steps to accomplish it. This is the time where the firm should be dedicated to establishing what exactly is the desired result of this project, i.e. what does the firm want? Some of the first points to identify in any brainstorming session are why this solution is being considered, and what processes are the focus of this initiative. Specific items that need to be considered: is blockchain a viable solution, does your organization have the technical expertise to make blockchain implementation feasible, and what problem does blockchain address? Design This is the stage where many organizations hit stumbling blocks and suffer setbacks, and that may be due to a common misunderstanding as to what blockchain can do. Put simply, this part of the decision-making process should focus around how to build out the blockchain. Private, or permissioned blockchains are where virtually all the corporate investment is occurring in this space, and that is because the organizing firm can specify not only who can join the blockchain network, but at what levels of access and what rights those members have. Moreover, current technology solutions may –- at this point— outperform the functionality blockchain can bring to the table. Develop Equally important, is establishing relationships with advisory firms who are uniquely qualified in blockchain technologies and implementation. This is necessary because technical and process standards are only now being developed. These firms can help choose the technology stack to help implement the blockchain solution together with other technical advancements in cryptography, analytics, and governance. These all represent important points to consider as the blockchain chain itself moves from concept, to design, to implementation. The blockchain application will probably integrate with existing legacy systems, so define them, and in thinking with the end in mind, devise the criteria for roll-out strategy, staff training and timeline for deployment. Quality Assurance This step focuses on avoiding problems while delivering solutions. Blockchain technology by its nature reduces the need for certain processes and controls, so the way of thinking about audit and the concept of assurance must change. Blockchain is certainly a buzzword, a potential paradigm shift, but even with the buzz assurance and standards must be maintained. We must stress the necessity to test, test, test, before rolling out. This is also the time to review reports, KPI’s and other metrics designed to meet stakeholder expectations and concerns. And remember, staff needs to be trained on specific aspects of blockchain. These areas: 1) the education and development of staff to use blockchain and 2) the need for controls and process to ensure the integrity of blockchain information represent opportunities for proactive practitioners and firms. Deploy We look to the implementation by following the rollout strategy and criteria for deployment. Blockchain may be a new technology but nevertheless, like any other technology project — or project in general — metrics and timelines must absolutely be a part of how effectiveness is evaluated and reported. Only when blockchain is in production status will it deliver ROI, productivity and the improvements sought. Furthermore, companies need to derive measurable value from their blockchain initiatives. The failure rate of new blockchain implementations will be high. Organizations need to focus on the problem blockchain addresses, the business case, and match the technology to solving that problem, communicating with users along the way. Following this agile methodology will help achieve success with blockchain. That is, identify the business case, work together with the end users, optimize a process with the right combination of technologies, authenticate and adopt. Only after these steps have been completed can management confirm value on this deployment and identify the next challenge for a blockchain application. We have confidence this model will lead to a successful completion. https://njcpa.org/stay-informed/topics/article/2018/11/30/a-plan-for-blockchain-implementation Dr. Sean Stein Smith, CPA, DBA, M.S., M.B.A., CMA, CGMA, is an assistant professor at Lehman College. He can be reached at email@example.com. Stephen F. McCarthy, CPA, CGMA, M.B.A., is the owner of The Presidents Forum. He can be reached at firstname.lastname@example.org.
At a meeting of The Presidents Forum this week on IT controls, the members talked about Costco’s recent annual report announcement of a material weakness in internal controls. Costco stated, “the weakness relates to general information technology controls in the areas of user access and program change-management over certain information technology systems that support the company’s financial reporting processes.” Even though this weakness only indirectly impacted the financial statements at Costco, the repercussions were great. This type of weakness is one that many can easily have in today’s world. The question around the table — “Is this a risk area in our businesses?” Who is in control of the changes to our IT systems, especially financial reporting systems? Is it an outsourced vendor? And, is it likely that we would detect or prevent any material errors in a timely basis? As systems become more complex, it is not only harder to stay on top of technology but, after changes are made, ensure the controls still meet the control objectives originally set. The meeting didn’t produce a simple answer to prevent a Costco-like event but made the members more alert to the challenges of complex systems.
At a meeting of The Presidents Forum this week, Christopher E. Hartmann, Esq. of Hartmann & Anglim, LLC talked about The Equal Pay Act which became effective on July 1, 2018. It should be viewed seriously because it was added to New Jersey’s Law against Discrimination (“LAD”), one of the nation’s most sweeping civil rights statutes. The LAD’s protections have been construed expansively by New Jersey’s courts.
- Hartmann advised the members that, depending on the number of employees, businesses should review job descriptions and responsibilities carefully to preserve honest differences in pay scales. As always, objective, performance-based distinctions are most likely to survive scrutiny. These include specialized training or skills, higher responsibilities or experience in situations requiring the exercise of judgment. Consider expanding job levels within departments (i.e. “senior sales associate”) with measurable or merit-based criteria, and not necessarily seniority alone.
- Hartmann cautioned that the burden is on the employer to justify pay differentials that disfavor employees who are within the LAD’s protected class. The Equal Pay Act’s protections extend beyond gender discrimination, and include all illegal trait-based discrimination in compensation, such as age, race and religious affiliation.
- Hartmann’s overview of the new Equal Pay Act was well-received by all.
At a recent meeting of The Presidents Forum, the members again had a discussion on Blockchain. With all new technology, we use different words to describe features. In Blockchain, we frequently hear immutable and irrefutable. Immutable means the transaction cannot be altered or changed. If the parties want to void the original transaction, they create a new transaction to reverse the first, but both transactions are visible. Irrefutable means operational transparency that allows trust to be instantly established. Both of these features create efficiencies. We also hear about “Smart contracts”. These are regular contracts that have many contractual clauses, coded into the computer, that allow contracts to be made partially or fully self-executing and self-enforcing. Again, creating efficiencies. A frequent question is “what types of processes could be considered for Blockchain applications?” A recent Supreme Court decision opened the door to legalized sports betting (particularly in NJ). Blockchain with its immutable, irrefutable and smart contract features will play a significant role to sports bettors by providing security under Blockchain’s secure and trusted platform. How do we think about other processes to consider. Just like any other decision, the process should have viability, feasibility and desirability. Another active discussion among The Presidents Forum members on a technology that may not be as far in the future as some think.
At the recent AICPA Item Development Meeting in Fort Lauderdale, I gave a presentation on Blockchain to the AICPA members there. Blockchain is an exciting technology that will dramatically change the way business is conducted. Blockchain is a DLT (distributed ledger technology), a shared platform, for recording transactions and tracking assets. It is a transactional platform enabling other technologies such as AI (artificial intelligence) virtual reality, 3D printing and robotics to be part of the economy. As Don Tapscott, coauthor of Blockchain Revolution wrote “The internet of everything needs a ledger of everything for it to work.” An exciting feature of Blockchain is “smart contracts”. These are self-executing contracts. The terms of the agreement are written directly into lines of code and subsequently executed in accordance with the terms. Logistics and supply chain are a perfect application for smart contracts. Blockchain and the applications that run on it will simplify complex multi-party systems while reducing fraud and theft, making logistics much more efficient. It can be argued that widespread usage of Blockchain and its applications are still some distance away, but that horizon is getting closer and the CPA’s at the meeting agreed that now is the time to start planning.
4/19/18 At yesterday’s meeting of The Presidents Forum, we had a presentation on Blockchain. We heard:
- Blockchain is a transactional platform that facilitates the process of recording transactions and tracking assets, both tangible or intangible, in a network.
- Blockchain essentially serves as a database for recording transactions, but its benefits extend far beyond those of a traditional database.
- Blockchain will enable other technologies such as Artificial Intelligence, 3D printing, Virtual Reality and the Internet of Things to be part of the economy.
- For example, Bitcoin, a virtual currency is an application developed to run on Blockchain.
- Other applications are slow in development, but dramatic change will occur when we couple blockchain with smart contracts, automated processes (robotics) and AI.
At today’s meeting of The Presidents Forum, there was a discussion on the need for more infrastructure spending in the U.S. At the beginning of this year there was talk of a combined private public trillion-dollar infrastructure spending spree. This initiative did not get off the ground. By way of contrast, Angela Liu, CEO of Crispy Green, mentioned the trillion-dollar Chinese infrastructure initiative OBOR (One Belt, One Road). Already, more than $900 billion in projects are planned or underway, according to Fitch Ratings. This is the type of spending we need here. Members of The Presidents Forum, sitting around the table discussed the great need for projects such as roads and ports that primarily aim to boost productivity and growth. There’s also demand for more social infrastructure spending such as hospitals, schools and drinking and wastewater facilities. Spending with a primary goal of improving citizens’ quality of life. However, infrastructure spending faces new risks. Do our infrastructure decision-makers have the skills to prepare for emerging opportunities and challenges, as we move away from engineering-driven, labor intensive projects toward more smart technologies? Furthermore, our infrastructure investment needs to be sustainable, projects that most likely will bring long-term economic, environmental and social benefits. Much of our recent infrastructure spending is a response to natural disasters. And, that takes money away from other projects. The members at The Presidents Forum agreed that while the investment in well-structured infrastructure projects is considerable, failure to invest will lead to a serious competitive disadvantage for the U.S. We heard good ideas today, hopefully, someone else is listening.
11/06/17 Last week, at Withum Smith & Brown’s 2017 Global Summit in NYC, we heard about political and policy influences on the ever-changing global environment. Also discussed was the new US House tax reform bill. While the final bill will be different from this first draft, the bill signals some major changes. Changes means winners and losers. The uncertainty faced by taxpayers today, poses a tremendous challenge – how to adapt. After the final tax bill is passed, taxpayers must quickly act to refine, reinvent or even reshape their own financial position. This is not easy when the changes happen close to the end of a year. However, Withum had some first steps, accelerate deductions and delay income. In addition to changing for this tax year, taxpayers need to look long-term at these new provisions. Home ownership seems to be under attack with limitations on both mortgage interest and real estate taxes. What is a taxpayer to do? Speak with a professional, and learn to be more adaptable.
11/03/17 Today, at Withum Smith & Brown’s 2017 Global Summit in NYC, we heard about political and policy influences on the ever-changing global environment. Of course, because the US House passed a tax reform bill yesterday, we heard some perspectives on overall tax changes. Corporations will realize about 2/3 of the benefits if the law gets passed as released. As usual with any tax reform, there will be winners and losers. The proposed law will incentify equity investments in corporations with dis-incentives for debt financing (interest expense limitations). The trend most talked about was ever increasing compliance. All governments are demanding more information, then sharing it with other governments while putting restrictions on corporations for the same information. For example, Germany and other European countries are requiring in 2018 that businesses maintain information on customers in the country where the customer lives. There is also substantial sharing of tax-data among countries, all to increase tax collections. How about, repatriation included in the new House bill. There will be a one-time deemed repatriation of the Earnings and Profits (E&P) of a foreign subsidiary. Deemed means they will charge the tax regardless of whether the money comes back to the US. So, the effect on economic growth will not be as beneficial as originally proposed but the repatriation will increase tax collections in the short term. The final message– all taxpayers, individual and corporate, should consider measures to accelerate deductions and push income into later years. Of course, all could change when the Senate releases their plan next week. Stay tuned.
9/14/17 At a recent meeting of The Presidents Forum, we talked about Â the industry power that Amazon wields. Amazon can change the strategy of many players in the retail sector even those who are not direct competitors. They have also changed the buying habits and the way consumers research and purchase products. This wide-ranging power was demonstrated recently after their purchase of Whole Foods. Last week, Target announced major changes in strategy, with a news article stating “Target slashes prices on thousands of items, shares falter. The retailer, which said it would continue to offer discounts on some products in addition to the price-cuts, added that it had also eliminated more than two-thirds of its price and offer call-outs.” All in response to Amazon. This made for interesting discussions at the table on who holds the bargaining power for our companies; customers, suppliers or a big player like Amazon. What lessons are there for all businesses? Most important is the need to maintain competitiveness and that means innovate, constantly changing the way we do business, the products and services we offer and improvements in customer service.
6/21/17 At yesterday’s meeting of The Presidents Forum, Anthony L’Altrelli, Partner at Withum talked about tax reform. The last tax reform was 31 years ago in 1986. The one before that was in 1954, 32 years before the 1986 Act. So it seems the time is right for tax reform. The President issued a one page “Goals For Tax Reform” based on his campaign promises of tax relief for American Families and Businesses that includes a territorial tax system. Three members of congress also submitted their own separate tax reform proposals: Ryan, Hatch and Camp. Three significant items for individuals under Trump’s plan are:
- A reduction from 7 to 3 tax brackets of 10%, 25% and 35%
- An elimination of the state and local taxes and property tax deduction
- A doubling of the standard deduction but elimination of the personal exemptions
5/31/17 At a recent meeting of The Presidents Forum, Bill Blum, Alpine Business Systems, reminded us to maintain a cyber security awareness. Some points Blum stressed: 1) The best way to protect yourself is to NOT click on any link in an email, text, or tweet unless you are Sure it is safe. 2) DO NOT click to open any attachment unless you are Sure it is safe. 3) There is no single cybersecurity solution that is sufficient; we need multiple layers of defense – anti-virus, firewall, Operating System updates, virus protection, to protect all assets. 4) Backup your personal data to a reputable service (Mozy, Crashplan, Carbonite). REMEMBER syncing your data to iCloud, Google Drive, or One Drive is NOT a backup. You need to back up to a place that has a different username and password. 5) Use a Secured Wi-Fi Network. On an unsecured public Wi-Fi network, information is not encrypted, putting your personal information at risk. 6) Of course, ongoing education and training are necessary to be vigilant against new risks and threats. 7) Finally, we must take better control of our own digital security to keep safe from cyber threats Good points from Blum that were well received by the members attending.
At a meeting this week of The Presidents Forum, as part of a broader discussion about long-range planning, risk management, and market opportunities, the members talked about the ominous tones coming from the retail sector. There are lessons to be learned from this troubled sector, but mainly a reluctance to change. As an example, on Tuesday, Sears announced in their annual 10K filing “Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern…While our historical operating results indicate substantial doubt exists, we want to be very clear that we’re taking decisive actions to mitigate that doubt.” While Sears may mitigate losses, and raise cash by selling assets such as Kenmore appliances, Diehard batteries and the recent sale of Craftsman tools, Sears will struggle as they attempt to transform itself from a catalog mentality to an on-line mindset. Change may be hard but as former UCLA basketball coach John Wooden said “Failure is not fatal, but failure to change might be.” An active discussion among the members revolved around the need to keep focused on our principle business activity. The lesson for us, as the members stressed, is to continually assess our own business model to assure it continues to focus on the needs of our future customers not the past ones. And, of course, change when necessary.
2/27/17 Each year, I look forward to two annual newsletters. The Bill and Melinda Gates letter came on Valentine’s Day. Warren Buffet’s annual letter to Berkshire Hathaway shareholders came this past Saturday. Both newsletters are full of confidence for today and the future. Buffet’s letter focuses on the American stock market and what its trends broadly represent. Buffet wrote “America’s economic dynamism… One word sums up our country’s achievements: miraculous… Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.” The Gates newsletter’s emphasis is on world poverty and what those trends represent. Bill Gates wrote “Actually, in significant ways, the world is a better place to live than it has ever been. Global poverty is going down, childhood deaths are dropping, literacy is rising, the status of women and minorities around the world is improving.” Melinda Gates added “Optimism is a huge asset. We can always use more of it. But optimism isn’t a belief that things will automatically get better; it’s a conviction that we can make things better.” The Gates newsletter ends on a positive note regarding the success of their initiatives: “We can’t put a date on these events, and we don’t know the sequence, but we’re confident of one thing: The future will surprise the pessimists.” Each of these two newsletters are lengthy but are worth reading as they provide lots of reasons for each of us to be upbeat. I’m already looking forward to next year’s.
01/18/17 At yesterday’s meeting of The Presidents Forum, the members had a discussion on smart technologies, that may increase our personal productivity. The discussion started with smart house technologies like: lights, thermostats, security and video doorbells. Members commented that these technologies are not yet as seamless as advertised. The next group of technologies is “everything on demand” –sort of the Uber of everything: transportation, food delivery, lodging, personal services, etc. This is another tool requiring multiple apps that yet, don’t integrate well with each other. A third group of potential technologies that improve productivity is digital personal assistants. Siri, Cortana and Google Now are among the most popular of a wide range of personal assistant apps, but they are only best at small everyday tasks. The last group of personal technologies discussed was smart entertainment. There is also a large mis-match here, with new TV’s more powerful than the incoming signal, and computer technology that doesn’t assimilate well with home entertainment. The members generally are tech-savvy and use new technologies for both business and home use but we frequently heard “the technology is just not there yet”, when discussing these new products and services.
At a recent meeting of The Presidents Forum, the members had a broad discussion on business transformation, and the need to understand factors that drive competitive advantage, especially among small businesses. Bill Blum, Alpine Business Systems, talked about two industries that will undergo substantial shifts: automotive and lawn care. These shifts, driven by customer preferences will change the way we use these products and services. For example, in the lawn care business, Scotts is creating grass seed that requires little water and fertilizer and only needs to be cut every six weeks. That means we only need 1/6 the number of landscape contractors we have now, with lawn equipment sales also suffering. Likewise, in the automotive sector, electric vehicles, self-driving cars and connectivity will change our thinking about cars to a shared-mobility concept. If ride sharing catches on in a big way, service stations and auto-parts stores, among others, will be negatively affected. However, other new industries though will spring up. While the members discussed use of analytic models, most felt the most effective approach begins first, with identifying the business opportunity and second, determining how models can improve outcomes. This was a great conversation in a rapidly changing world.
At Withum’s Fourth Annual Global Summit, we heard one panel, comprised of representatives of international accounting firms associates with Withum, discuss Congress and international business policies. This discussion was interesting because of the highly-charged focus on trade agreements at Monday’s Presidential Debate. An overall feeling was that trade agreements have had more modest effects on the US economy than the rhetoric suggests. These agreements promote and govern not only traditional goods and services but technology-intensive services where the US has a strong competitive advantage. The agreements provide a rules-based-system that protects intellectual property such as patents by providing dispute settlement procedures when disagreements occur. The US has been a big beneficiary of these procedures. While high-tech and agriculture has benefited from recent trade deals, there have been losers and this is what we heard about in the debate. Manufacturing that relies on unskilled labor has moved to lower wage countries. Perhaps the US has not done all it could to help these disadvantaged workers at home who feel no comfort that jobs are created elsewhere in the US. As this notable panel summarized, trade deals are only a small part of globalization with its rapid movement of goods and service throughout the world. Much of the rapid change in the world economy has come from technological innovation not trade deals. The panelists believed our two presidential candidates were correct that some aspects of trade deals and government policies need to be constantly monitored. An example frequently mentioned is China’s currency manipulation which increases their trade surpluses. The US needs to take action on these type of abuses. The panels put together by Withum from their international partners at HLB International provided a view from outside the US. Their perspective was refreshing and much more positive on the US economy than we sometimes hear. Withum puts considerable effort into these Summits and it shows.
9/27/16 At a recent meeting of The Presidents Forum, the members had a discussion on the new cyber-security regulations in New York State. These proposed regulations require regulated financial institutions to; · establish a cybersecurity program; · adopt a written cybersecurity policy; · designate a Chief Information Security Officer responsible for implementing, overseeing and enforcing its new program and policy; · have policies and procedures designed to ensure the security of information systems and nonpublic information accessible to, or held by, third-parties; · conform to a variety of other requirements to protect the confidentiality, integrity and availability of information systems. · While these regulations are aimed at financial service companies, ensuring the protection and privacy of confidential information is every company’s responsibility. The members at The Presidents Forum spoke about the need to move past the talking stage and begin to implement some of these programs and policies themselves. Members agreed that while the investment in new resources might be considerable, protecting against cyber-attacks is sensible spending.
At a recent meeting of The Presidents Forum, the members had a discussion on the new Department of Labor overtime rules that go into effect on December 1. These new rules change the salary threshold for those eligible for overtime pay from $23,660 to $47,476. While there is a “white collar” exemption from overtime for certain employees, it is not the job title that allows the exemption but three tests that must be met: salary basis, salary level and standard duties. These new rules will require more record keeping about hours worked and duties performed, even for those who were previously salary-based employees. There needs to be a well-thought-out process for these employees under the threshold, that is, raise their salary above the new threshold or begin paying them overtime. This may be a good time to re-evaluate and change responsibilities not only to conform to the new regulations but to improve productivity. The members present agreed on the need to consult an attorney with labor-law experience and an accountant to examine labor cost scenarios before the December 1 effective date. That gives us three months to plan for change.
At yesterday’s meeting of The Presidents Forum, Angela Liu, President, Crispy Green Inc told us she does a sizable amount of her business through Amazon. Liu related that Amazon no longer wants to compete in pricing. She told us this new pricing strategy will surely open doors for other online retailers to go after the bargain hunters. But for those customers who just want to get their purchases fast and no hassles, Amazon still has a huge advantage because of its distribution network and infrastructure. Liu believes that Amazon is shifting more towards the Alibaba model, which will basically be a giant online flea market under the Amazon roof with Amazon taking a cut of every transaction. Amazon is moving from a “Vendor Central” model to a “Seller Central” model, so it won’t have to own inventories of the products it sells. Amazon will provide financial, logistic and other business services under its “Prime”, which is a big draw to a lot of consumers. The Prime membership will then become a main source of profit much like membership fees are to Costco.Frequently, when large companies change their business model, it forces smaller companies who do business with them to also change their model. The overall message from Angela Liu; be prepared for changes.