Accounting Today: AICPA CEO Melancon Anticipates Major Tax Reform

American Institute of CPAs president and CEO Barry Melancon is expecting Washington to pass major tax reform legislation during the Trump administration, and some Democrats may even cross the aisle to help Republican lawmakers enact it.

Speaking Tuesday in New York at a meeting of the Accountants Club of America, Melancon gave his predictions for tax reform and addressed a wide range of other topics of interest to CPAs.

Melancon acknowledged that nobody knows exactly what’s going to happen with tax reform in the political process. “There are some pretty interesting provisions that are being debated, and I think they will have huge ramifications to anybody that’s in the planning area and the tax area,” he said.

He believes Republicans in Congress will probably need to use the budget reconciliation process to repeal the Affordable Care Act and the Dodd-Frank Act, as they won’t have enough votes to overcome the 60-vote threshold needed to defeat a filibuster. But for tax reform, he believes enough Democrats will go along if the GOP can build some bipartisan support for long overdue reforms.

“The reason for that is you have eight Democratic senators up for re-election in 2018 who now reside in states that voted for Donald Trump, so they will need politically to look for some things to be able to convey back home,” he said. “I think the potential for tax reform will fall into that. No matter who you are or where you are on the political spectrum, it’s pretty easy to beat up on the tax code and the IRS and certainly for those senators that would be the case.”

Unlike previous years when everyone in Washington talked about tax reform, but could not get Democrats and Republicans to agree on legislation, Melancon believes it will happen with this Congress. “The political winds are there for it to pass,” he said. “In all likelihood, it will be the most significant piece of tax reform legislation since 1986, and all the CPAs in the room know very clearly what I’m talking about when I say that. It will be a very significant change if it goes through the process.”

He pointed out that House Speaker Paul Ryan, R-Wis., and his fellow Republicans unveiled their own tax reform proposals last year, which they called “A Better Way.” He said they would try to reconcile those with President Trump’s tax proposals and noted they aren’t far apart. “They’re not oceans away,” he said. “They’re in the same space.” Ryan has spoken at an AICPA conference and is committed to tax reform, he noted.

Melancon predicts one of the tax reforms will involve allowing the Internal Revenue Service to automate tax processing by using information returns. “The technology actually exists today that you could take all of the information returns and, for the vast majority of American taxpayers, the IRS could calculate their taxes and either send them a bill or send them a check,” said Melancon.

Among other potential changes could be a repeal of the alternative minimum tax and the estate tax. Melancon also anticipates possible changes in the tax rules surrounding pass-through entities, reasonable compensation and foreign revenue.

“There is a lot of traction for 100 percent write-off of all depreciable assets, except land,” he added. “They’re even talking about 100 percent write-off of inventory from a business incentive or business-processing standpoint. You can also imagine some of the passive loss rules that exist in the current tax law and how they might play out in a transition situation.”

Melancon believes compromise will be necessary if Congress is going to be able to pass tax reform or health care reform legislation. “Our system is based on compromise, if you go back in history,” he said. “Social media has driven us to the extremes. You can’t pass anything that has less than purity because the social media extremes go crazy. The fact of the matter is the vast majority of Americans are in that middle part.”

Technology Advances

Melancon also discussed some of the AICPA’s other priorities, including advances in auditing technology. He pointed out that the largest accounting firms are spending hundreds of millions of dollars on technologies such as artificial intelligence, data analytics and even drones to help with audit-related functions. The AICPA wants to do something to help smaller firms compete by giving them access to some of the newer audit technologies.

“We might need to bring X number of firms together to create solutions from that standpoint and then make that available to the whole profession, with some advantages for the people who invest upfront,” he said.

He acknowledged some hiccups with recent changes in the peer review process among CPA firms. “There have been some rumblings, as we knew there would be,” he said. “We had a six-point plan in how to improve audit quality. The changes in peer review are more potentially painful for being one particular firm. We certainly have members complaining about that.”

Melancon also described how the AICPA has been developing an attestation credential for cybersecurity, and he foresees many companies will demand such services for checking on what steps they have taken to guard against data breaches.

“We can’t absolutely prevent cyber problems, but what we can do is provide an attestation that we did all the things we were expected to do,” said Melancon. “It will cascade down to smaller businesses because supply chain mechanics will require big companies who use small companies to insist on that in their own contracting requirements because small companies interface with the technology of big companies, and they potentially become the weak link in that process.”

The AICPA has also developed a clearinghouse of private company information that can be used to authenticate companies, Melancon noted. He sees the service model for CPAs changing, with more demand for services like sustainability reporting and integrated reporting. The AICPA has also been keeping a close eye on developments in blockchain technology, which could have a far-reaching impact in the financial world for tracking transactions.

Accounting Student Pipeline

The pipeline of students going into accounting remains strong, Melancon noted, but more of them are now opting for jobs in industry rather than public accounting firms. The AICPA is also seeing a continuation in the trend of young people leaving CPA firms for careers in industry. The main reason is pay, according to a recent survey by the AICPA.

“The migration pattern for college is different,” said Melancon. “Increasingly people are not going into public practice. They’re going into industry directly. Short term, that hurts. Long term, when it comes to hiring experienced people, I think that’s going to be the migration pattern in the future. That’s one reason why we have the strategy for connecting those people through the CGMA [Chartered Global Management Accountant credential] with the profession, but I do think a large percentage of them will find their way at some point in their careers into public accounting.”

The number of CPA Exam candidates is up this past year, in part due to changes in the format of the exams. The AICPA has also been pressing firms to encourage more of their employees to sit for the exam and has been working with the state societies and the National Association of State Boards of Accountancy on the initiative.

International Expansion

The AICPA has also been expanding abroad. It formed an international association with the Chartered Institute of Management Accountants that took effect on January 1. Combined, they now have 650,000 members with 30 offices in 22 countries. “The U.S. is not on an island, despite what some politicians might believe,” said Melancon.

Last week, in its first public announcement, the new Association of International CPAs voiced its opposition to a plan by South Africa’s Independent Regulatory Board for Auditors to implement mandatory audit firm rotation. Melancon believes such a move could potentially cascade and have an impact in the U.S. and other countries.

The reputation of the CPA brand has never been stronger, according to a poll by the AICPA. “The world has no place it points to for trust,” said Melancon. “We don’t trust anybody. We don’t trust politicians. We don’t trust big institutions. We don’t trust religious leaders. We don’t trust the internet. But the world still trusts the CPA profession.”