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Surging long-term rates stoke GOP tensions on tax cuts

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Surging long-term interest rates and stubborn inflation are inflaming divisions among congressional Republicans over paying for the sweeping tax cuts Donald Trump promised, complicating the path to passage with the party’s already tenuous majority.

“The bond vigilantes are coming,” Representative Andy Barr of Kentucky warned a group of House Republicans behind closed doors on Wednesday, resurrecting a catchphrase of the 1980s and 1990s, when concern over high interest rates set by the bond market drove Washington to take painful steps to bring down budget deficits.

Barr, a senior member of the Financial Services Committee, pointed to a jump in long-term rates since September. “This is a tipping point,” said Barr, a firm tax-cut supporter, urging his colleagues to come up with credible spending cuts to assure bond investors the federal deficit won’t balloon.

The mood in markets and the nation’s financial situation are starkly different from 2017, when Trump and congressional Republicans passed a deficit-expanding tax cut. Yields on benchmark 10-year Treasury notes touched 4.8% this week, double what investors demanded just before Trump started his first term. Total US government debt held by the public reached almost 100% of the economy’s size last year, up from 76% in 2017.

Fresh deficit projections due Friday from the nonpartisan Congressional Budget Office are expected to show a worsening fiscal outlook as higher rates add to the cost of the government’s debt-servicing payments.

Cost-of-living concerns loom large after an election in which public discontent with the surge in prices in recent years was pivotal. Americans’ long-term inflation expectations jumped this month to the highest since 2008, according to the latest consumer sentiment reading from the University of Michigan. And Trump’s plans for broad new tariffs threaten to stoke more price increases.

The bond market’s travails have pushed mortgage rates back up above 7%, putting homes out of reach for more Americans. Higher yields also threaten to undermine the bull market in stocks.

None of this has cooled congressional Republicans’ enthusiasm for large-scale tax cuts. But it has intensified fiscal conservatives’ calls to offset revenue losses with substantial spending cuts, stoking further conflict within the party’s fractious and slender majority.

In the House, the defection of just a few Republicans can defeat any party-line legislation. GOP leaders already face internal struggles over causes such as California and New York lawmakers’ demands to lift a ceiling that the 2017 tax law imposed on deductions for state and local taxes.

Meanwhile, Republicans’ dominant establishment wing has long favored spending more on defense, agriculture and other projects important to their individual districts. Trump himself is among those calling for a military build-up and wants more resources for border security. The sweeping spending cuts the party’s fiscal conservatives demand also risk backlash from key political constituencies that could endanger lawmakers representing competitive districts.

But hardline conservative Chip Roy of Texas laid down a marker on the House floor Wednesday, saying spending cuts should be at least big enough to pay for the tax cuts so that the deficit will shrink rather than expand.

“As we speak, interest rates are going up, our debt is getting refinanced at higher interest rates, and we have more debt,” Roy told the House. “The American people didn’t send us here to keep racking up debt.”

Trump’s nominee for Treasury secretary, Scott Bessent, expressed concern Thursday at his Senate confirmation hearing that maintaining current budget deficits would threaten the government’s capacity to respond to a future crisis. But he blamed spending levels, not tax cuts.

Until recently, interest rates had largely remained subdued, going back to the 2008 financial crisis — reducing the burden of borrowing costs for the U.S. government as well as consumers and businesses. 

Not anymore. The COVID shutdowns and subsequent massive government stimulus reset things not just for the U.S., but the global economy. Inflation has since been persistently higher.

Yields on 10-year Treasury notes have climbed roughly a percentage point since mid-September, even after the Federal Reserve embarked on a course of cuts to its short-term benchmark rate — a jarring disconnect that has few precedents in recent history. The jump in longer-term yields is partly due to the economy being stronger than expected, but Trump’s agenda of tax cuts and tariff increases also has provoked anxiety.

“The bond market has begun to express their discomfort, and inflation being sticky is also a warning for Trump 2.0,” said Stephen Jen, chief executive of Eurizon SLJ Capital.

It’s likely that the dollar’s dominant role in global finance will continue to shield the U.S. from the kind of fiscal scare that has shaken other governments, such as the U.K. and Italy, as investors demanded a higher premium to hold their debt, Jen said.

“The U.S. will probably enjoy a higher ‘boiling point’ than Italy did,” said Jen. Even so, investor worries are sufficient “to start to price in this risk through a higher term premium,” he said — referring to the extra yield demanded for longer-term securities instead of just rolling over holdings of short-term ones.

Republican Rand Paul of Kentucky, who has tried for years to slash the budget, said rising long-term rates have “unmasked the problem” of the national debt and prompted behind-the-scenes debates among Republicans over how much new debt is acceptable. But he said the members of his party who don’t want big spending cuts remain dominant.

“Everybody professes to care,” he said. “There is a very small number that would actually cut serious spending.”

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IAASB tweaks standards on working with outside experts

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The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

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Tariffs will hit low-income Americans harder than richest, report says

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President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

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At Schellman, AI reshapes a firm’s staffing needs

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Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

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