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Time for accounting firms to double down on DEI

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In the face of recent backlash and a broad corporate pullback on diversity, equity and inclusion, experts say the accounting profession largely remains on track with its efforts. 

But while the profession remains strong in DEI, experts point to a loud minority amplifying an unpopular sentiment that, as a result, may see some firms quietly retreating out of fear of legal or political backlash. 

Experts agree that now is not the time to become complacent. They remind accountants that DEI is ultimately a boon to firms in terms of the bottom line and talent development — making it an invaluable lever to pull amid an ongoing talent shortage.

Breaking down DEI

The politicization of DEI has made it easy to lose sight of what the term actually means and what its implementation looks like in a firm. 

Diversity encompasses more than just race, ethnicity and gender. It also refers to age, marital status, parental status, neurodiversity, socioeconomic status, veteran status, nationality, immigration status, physical ability or disability, religion and more. 

“I don’t know how we let someone take the word ‘diversity’ and make it all things bad,” said Kimberly Ellison-Taylor, former chair of the American Institute of CPAs’ National Commission on Diversity and Inclusion. “To the extent that people don’t really understand what diversity means, that’s when you see them using it, not knowing that it includes the veterans programs, it includes the programs for young people, it includes programs for women, it includes mental health programs.”

Equity is the “assistive things that people need in order to be the best version of themselves,” Ellison-Taylor explained.

Equity is often conflated and confused with equality, but the difference is significant: Equality entails providing everyone with the same treatment across the board, while equity entails providing varying kinds of help according to each individual’s needs.

Illustration of equality versus equity concepts

“Originally, we used to talk about equality, and equality was, ‘We’re all equal. There’s a level playing field.’ Part of what DEI looks at and says is that not all people have the same opportunity as others do, and some people need a boost to enable them to have that opportunity,” said Donny Shimamoto, founder of CPA firm IntrapriseTechKnowlogies. “That’s why they show that picture of the sliding boxes. The shorter person needs a bigger box to have the equal view over the fence. If you gave everyone the same box, which is equal, the short person still can’t see over the fence.”

Lastly, inclusion is making sure everyone feels like they have a place in the profession. 

“If we’re doing it well, everyone would know where they fit, and they would not begrudge the assistance that other people are getting in order to be their full, productive selves,” Ellison-Taylor said.

Temperature check

In 2020, George Floyd was murdered by Minneapolis police, inciting a summer of racial unrest across the country. In corporate America, Floyd’s death prompted a wave of renewed commitments to DEI initiatives and programs, such as implementing diverse recruitment practices, increasing pay equity, establishing employee resource groups, and hosting trainings on topics such as unconscious bias and microaggressions. But now major companies like Ford, Microsoft, Tractor Supply, John Deere and Harley-Davidson are making headlines for reversing their DEI commitments.

It’s the result of recent political and cultural rollback: The Supreme Court decision in June 2023 effectively ending affirmative action admission programs at colleges and universities across the country, state lawmakers passing legislation restricting DEI programs on campuses and other public institutions, and powerful businessmen such as Bill Ackman and Elon Musk vocally arguing against DEI.

The general consensus among accounting leaders is that most firms are still moving forward, despite the politicization and broader corporate backlash, while a small group have pulled back. Where experts disagree is the degree to which firms are pulling back and just how many are doing so.

“The accounting profession remains strong in our stance on the importance of DEI. The future of the profession demands it,” said Anoop Mehta, past chair of the AICPA and current chair of the AICPA NCDI, noting that it is a loud minority that opposes DEI. “Now certainly is not the time for employers to overreact to whatever is going on or what you’re seeing in the media. … This is now the time to double down.”

Bonnie Buol Ruszczyk, president and manager of the Accounting MOVE Project said, “It depends on the firm that you’re looking at.”

“This is a really loud minority,” she said. “They’re the squeaky wheel, but most people do feel that this is important. They may be on different spots on the spectrum as to how important it is or what elements of it are important, but this is not a 50-50 kind of thing by any means.”

Sandra Wiley, president of Boomer Consulting, said that many firms are frightened to associate with the politics and fear the legal risks their DEI initiatives may pose. 

“Firms are almost scared to talk about it anymore because they’re afraid that what people are trying to say is that the firm will be more Republican or Democrat, which is stupid,” Wiley said. “It’s not about politics. It’s about the human aspects of what is right and what is not right.”

Firm leaders “don’t want to admit that there’s a systemic problem going on,” Wiley said, and that refusal results in top leadership being majority male and white.

Wiley said some firms are pulling back for financial reasons — they look at DEI positions in their firm and ask if they’re really boosting profitability, which means DEI leaders “have got to start looking at their metrics deeper so that they can protect their positions.” 

“The pushback on it is a little bit dumbfounding to me,” Buol Ruszczyk added. “There are those that have been in positions of power that see this as somebody trying to take their power away.”

But she clarified that implementing DEI does not mean leadership giving up their piece of the pie: “What it does is it creates a larger environment.”

“Pulling back is only going to position your firm as being run by people that don’t care about this kind of stuff,” she said. “They don’t care about their employees. They don’t care about reaching people outside of the majority of firm employees.”

The upsides of DEI

Leaders say DEI is an obvious solution to the profession’s pipeline problem. With fewer students studying accounting, fewer earning their CPA and even fewer staying in the profession until they make partner, firms need to improve both recruiting and retention. 

“When people say they can’t find talent, I’m like, ‘Where are you looking? Who are you bringing? Who are you asking?'” Ellison-Taylor said. “To some degree, it takes diverse talent to help locate diverse talent.”

Trevor Williams, audit partner and director of DEI at GRF CPAs in Bethesda, Maryland, said firm leadership is mistaken “if you don’t think your employees want to see the staff be diverse.”

“In order for DEI to be successful, there has to be a tone at the top, not just one person in leadership,” Williams added. “In order for staff to really have buy-in, they need to see that their leaders are actually bought into the various initiatives or the culture of the firm.”

“Organizations and firms do their due diligence and go through the interviewing processes, so please believe that these candidates are doing the same,” Williams said. “It’s very easy to go on your firm’s website and do a dropdown and see what leadership looks like, and if the leadership doesn’t look like that particular ethnic group, they’re not going to be that eager to join the firm.” 

The importance of diverse leadership cannot be overstated. Women, for instance, have consistently comprised just over half of all firm employees but often drop from the partner pipeline at the senior management level. This year, women comprised 35% of partners and principals, and 35% of management committees, according to the 2024 Accounting MOVE Project report

DEI is important to retaining young talent, too. For the next generation of accountants, seeing a diverse workforce when they walk through the doors is an important factor in convincing them to stay.

“Gen Z, the 20-year-olds that are popping up in the workplace today, they simply do not understand why there is even a problem,” Wiley said. “And what they really don’t understand is when they walk into the workforce, and it is completely different from what they have felt and seen and experienced in their life outside of the firm. So they go to college, or they go to school, or they go to networking events with their friends and they see a ton of diversity, and then they walk into a firm and it looks whitewashed, and they don’t get it.”

“I don’t understand why firms aren’t looking through that lens and seeing what the young people are seeing today. And so unless we change that, we are not going to retain,” Wiley continued. “They are going to leave in mass numbers, which is what’s happening right now.”

Research shows that DEI impacts the bottom line. Companies in the the top quartile for gender diversity on executive teams are 25% more likely to have above-average profitability than companies in the bottom quartile, and companies in the top quartile for ethnic and cultural diversity outperformed by 35% in profitability, according to a McKinsey report.

To break it down, retaining a diverse workforce can increase innovation and collaboration. 

“It’s really important, I believe, to have different perspectives at the table in the conversations,” said Lexy Kessler, vice chair of the AICPA and mid-Atlantic managing partner of Top 100 Firm Aprio. “If everybody has the same opinion, you’re not going to get the right answer. If you have people with different opinions and different backgrounds coming into conversation, then you get to the right answer.”

Kessler pointed to the cost of employee turnover. The cost of replacing an individual employee ranges from one-half to two times the employees’ annual salary, according to Gallup research

Client engagement is also a factor. “From a public accounting perspective, and I would think from a business and industry perspective as well, your investors, your clients, the business community, are diverse,” said Kessler. “If they see somebody that looks like you, there’s a connection.”

What’s in a name?

Some firms are dropping the name “DEI” in favor of using less politicized language such as culture, inclusion, wellbeing and belonging. They’re also emphasizing the human aspect of these efforts with terms like “people-centered” and “human-centered” leadership.

“By and large, many of the firms, I think, are standing on their values, standing on what means the most to their firm, and they’re sticking to it,” Ellison-Taylor said. “They may be calling it something different, but they are still doing the work, and I think that’s the most important part.”

“This is not a political issue,” Buol Ruszczyk said. “This is about people and about creating systems and situations where people are treated fairly.”

“You have to make it happen,” warned Mehta. “You can’t wait and hope for the best. You have to put processes in place, and you have to be intentional about it.”

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Senate unveils plan to fast-track tax cuts, debt limit hike

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Senate Republicans unveiled a budget blueprint designed to fast-track a renewal of President Donald Trump’s tax cuts and an increase to the nation’s borrowing limit, ahead of a planned vote on the resolution later this week. 

The Senate plan will allow for a $4 trillion extension of Trump’s tax cuts and an additional $1.5 trillion in further levy reductions. The House plan called for $4.5 trillion in total cuts.

Republicans say they are assuming that the cost of extending the expiring 2017 Trump tax cuts will cost zero dollars.

The draft is a sign that divisions within the Senate GOP over the size and scope of spending cuts to offset tax reductions are closer to being resolved. 

Lawmakers, however, have yet to face some of the most difficult decisions, including which spending to cut and which tax reductions to prioritize. That will be negotiated in the coming weeks after both chambers approve identical budget resolutions unlocking the process.

The Senate budget plan would also increase the debt ceiling by up to $5 trillion, compared with the $4 trillion hike in the House plan. Senate Republicans say they want to ensure that Congress does not need to vote on the debt ceiling again before the 2026 midterm elections. 

“This budget resolution unlocks the process to permanently extend proven, pro-growth tax policy,” Senate Finance Chairman Mike Crapo, an Idaho Republican, said. 

The blueprint is the latest in a multi-step legislative process for Republicans to pass a renewal of Trump’s tax cuts through Congress. The bill will renew the president’s 2017 reductions set to expire at the end of this year, which include lower rates for households and deductions for privately held businesses. 

Republicans are also hoping to include additional tax measures to the bill, including raising the state and local tax deduction cap and some of Trump’s campaign pledges to eliminate taxes on certain categories of income, including tips and overtime pay.

The plan would allow for the debt ceiling hike to be vote on separately from the rest of the tax and spending package. That gives lawmakers flexibility to move more quickly on the debt ceiling piece if a federal default looms before lawmakers can agree on the tax package.

Political realities

Senate Majority Leader John Thune told reporters on Wednesday, after meeting with Trump at the White House to discuss the tax blueprint, that he’s not sure yet if he has the votes to pass the measure.

Thune in a statement said the budget has been blessed by the top Senate ruleskeeper but Democrats said that it is still vulnerable to being challenged later.

The biggest differences in the Senate budget from the competing House plan are in the directives for spending cuts, a reflection of divisions among lawmakers over reductions to benefit programs, including Medicaid and food stamps. 

The Senate plan pares back a House measure that calls for at least $2 trillion in spending reductions over a decade, a massive reduction that would likely mean curbing popular entitlement programs.

The Senate GOP budget grants significantly more flexibility. It instructs key committees that oversee entitlement programs to come up with at least $4 billion in cuts. Republicans say they expect the final tax package to contain much larger curbs on spending.

The Senate budget would also allow $150 billion in new spending for the military and $175 billion for border and immigration enforcement.

If the minimum spending cuts are achieved along with the maximum tax cuts, the plan would add $5.8 trillion in new deficits over 10 years, according to the Committee for a Responsible Federal Budget.

The Senate is planning a vote on the plan in the coming days. Then it goes to the House for a vote as soon as next week. There, it could face opposition from spending hawks like South Carolina’s Ralph Norman, who are signaling they want more aggressive cuts. 

House Speaker Mike Johnson can likely afford just two or three defections on the budget vote given his slim majority and unified Democratic opposition.

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How asset location decides bond ladder taxes

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Financial advisors and clients worried about stock volatility and inflation can climb bond ladders to safety — but they won’t find any, if those steps lead to a place with higher taxes.

The choice of asset location for bond ladders in a client portfolio can prove so important that some wealthy customers holding them in a taxable brokerage account may wind up losing money in an inflationary period due to the payments to Uncle Sam, according to a new academic study. And those taxes, due to what the author described as the “dead loss” from the so-called original issue discount compared to the value, come with an extra sting if advisors and clients thought the bond ladder had prepared for the rise in inflation.

Bond ladders — whether they are based on Treasury inflation-protected securities like the strategy described in the study or another fixed-income security — provide small but steady returns tied to the regular cadence of maturities in the debt-based products. However, advisors and their clients need to consider where any interest payments, coupon income or principal accretion from the bond ladders could wind up as ordinary income, said Cal Spranger, a fixed income and wealth manager with Seattle-based Badgley + Phelps Wealth Managers.

“Thats going to be the No. 1 concern about, where is the optimal place to hold them,” Spranger said in an interview. “One of our primary objectives for a bond portfolio is to smooth out that volatility. … We’re trying to reduce risk with the bond portfolio, not increase risks.”

READ MORE: Why laddered bond portfolios cover all the bases

The ‘peculiarly bad location’ for a bond ladder

Risk-averse planners, then, could likely predict the conclusion of the working academic paper, which was posted in late February by Edward McQuarrie, a professor emeritus in the Leavey School of Business at Santa Clara University: Tax-deferred retirement accounts such as a 401(k) or a traditional individual retirement account are usually the best location for a Treasury inflation-protected securities ladder. The appreciation attributes available through an after-tax Roth IRA work better for equities than a bond ladder designed for decumulation, and the potential payments to Uncle Sam in brokerage accounts make them an even worse asset location.

“Few planners will be surprised to learn that locating a TIPS ladder in a taxable account leads to phantom income and excess payment of tax, with a consequent reduction in after-tax real spending power,” McQuarrie writes. “Some may be surprised to learn just how baleful that mistake in account location can be, up to and including negative payouts in the early years for high tax brackets and very high rates of inflation. In the worst cases, more is due in tax than the ladder payout provides. And many will be surprised to learn how rapidly the penalty for choosing the wrong asset location increases at higher rates of inflation — precisely the motivation for setting up a TIPS ladder in the first place. Perhaps the most surprising result of all was the discovery that excess tax payments in the early years are never made up. [Original issue discount] causes a dead loss.”

The Roth account may look like a healthy alternative, since the clients wouldn’t owe any further taxes on distributions from them in retirement. But the bond ladder would defeat the whole purpose of that vehicle, McQuarrie writes.

“Planners should recognize that a Roth account is a peculiarly bad location for a bond ladder, whether real or nominal,” he writes. “Ladders are decumulation tools designed to provide a stream of distributions, which the Roth account does not otherwise require. Locating a bond ladder in the Roth thus forfeits what some consider to be one of the most valuable features of the Roth account. If the bond ladder is the only asset in the Roth, then the Roth itself will have been liquidated as the ladder reaches its end.”

READ MORE: How to hedge risk with annuity ladders

RMD advantages

That means that the Treasury inflation-protected securities ladder will add the most value to portfolios in a tax-deferred account (TDA), which McQuarrie acknowledges is not a shocking recommendation to anyone familiar with them. On the other hand, some planners with clients who need to begin required minimum distributions from their traditional IRA may reap further benefits than expected from that location.

“More interesting is the demonstration that the after-tax real income received from a TIPS ladder located in a TDA does not vary with the rate of inflation, in contrast to what happens in a taxable account,” McQuarrie writes. “Also of note was the ability of most TIPS ladders to handle the RMDs due, and, at higher rates of inflation, to shelter other assets from the need to take RMDs.”

The present time of high yields from Treasury inflation-protected securities could represent an ample opportunity to tap into that scenario.

“If TIPS yields are attractive when the ladder is set up, distributions from the ladder will typically satisfy RMDs on the ladder balance throughout the 30 years,” McQuarrie writes. “The higher the inflation experienced, the greater the surplus coverage, allowing other assets in the account to be sheltered in part from RMDs by means of the TIPS ladder payout. However, if TIPS yields are borderline unattractive at ladder set up, and if the ladder proved unnecessary because inflation fell to historically low levels, then there may be a shortfall in RMD coverage in the middle years, requiring either that TIPS bonds be sold prematurely, or that other assets in the TDA be tapped to cover the RMD.”

READ MORE: A primer on the IRA ‘bridge’ to bigger Social Security benefits

The key takeaways on bond ladders

Other caveats to the strategies revolve around any possible state taxes on withdrawals or any number of client circumstances ruling out a universal recommendation. The main message of McQuarrie’s study serves as a warning against putting the ladder in a taxable brokerage account.

“Unsurprisingly, the higher the client’s tax rate, the worse the outcomes from locating a TIPS ladder in taxable when inflation rages,” he writes. “High-bracket taxpayers who accurately foresee a surge in future inflation, and take steps to defend against it, but who make the mistake of locating their TIPS ladder in taxable, can end up paying more in tax to the government than is received from the TIPS ladder during the first year or two.”

For municipal or other types of tax-exempt bonds, though, a taxable account is “the optimal place,” Spranger said. Convertible Treasury or corporate bonds show more similarity with the Treasury inflation-protected securities in that their ideal location is in a tax-deferred account, he noted.

Regardless, bonds act as a crucial core to a client’s portfolio, tamping down on the risk of volatility and sensitivity to interest rates. And the right ladder strategies yield more reliable future rates of returns for clients than a bond ETF or mutual fund, Spranger said.

“We’re strong proponents of using individual bonds, No. 1 so that we can create bond ladders, but, most importantly, for the certainty that individual bonds provide,” he said.

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Why IRS cuts may spare a unit that facilitates mortgages

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Loan applicants and mortgage companies often rely on an Internal Revenue Service that’s dramatically downsizing to help facilitate the lending process, but they may be in luck.

That’s because the division responsible for the main form used to allow consumers to authorize the release of income-tax information to lenders is tied to essential IRS operations.

The Income Verification Express Service could be insulated from what NMN affiliate Accounting Today has described of a series of fluctuating IRS cuts because it’s part of the submission processing unit within wage and investment, a division central to the tax bureau’s purpose.

“It’s unlikely that IVES will be impacted due to association within submission processing,” said Curtis Knuth, president and CEO of NCS, a consumer reporting agency. “Processing tax returns and collecting revenue is the core function and purpose of the IRS.”

Knuth is a member of the IVES participant working group, which is comprised of representatives from companies that facilitate processing of 4506-C forms used to request tax transcripts for mortgages. Those involved represent a range of company sizes and business models.

The IRS has planned to slash thousands of jobs and make billions of dollars of cuts that are still in process, some of which have been successfully challenged in court.

While the current cuts might not be a concern for processing the main form of tax transcript requests this time around, there have been past issues with it in other situations like 2019’s lengthy government shutdown.

President Trump recently signed a continuing funding resolution to avert a shutdown. But it will run out later this year, so the issue could re-emerge if there’s an impasse in Congress at that time. Republicans largely dominate Congress but their lead is thinner in the Senate.

The mortgage industry will likely have an additional option it didn’t have in 2019 if another extended deadlock on the budget emerges and impedes processing of the central tax transcript form.

“It absolutely affected closings, because you couldn’t get the transcripts. You couldn’t get anybody on the phone,” said Phil Crescenzo Jr., vice president of National One Mortgage Corp.’s Southeast division.

There is an automated, free way for consumers to release their transcripts that may still operate when there are issues with the 4506-C process, which has a $4 surcharge. However, the alternative to the 4506-C form is less straightforward and objective as it’s done outside of the mortgage process, requiring a separate logon and actions.

Some of the most recent IRS cuts have targeted technology jobs and could have an impact on systems, so it’s also worth noting that another option lenders have sometimes elected to use is to allow loans temporarily move forward when transcript access is interrupted and verified later. 

There is a risk to waiting for verification or not getting it directly from the IRS, however, as government-related agencies hold mortgage lenders responsible for the accuracy of borrower income information. That risk could increase if loan performance issues become more prevalent.

Currently, tax transcripts primarily come into play for government-related loans made to contract workers, said Crescenzo.

“That’s the only receipt that you have for a self-employed client’s income to know it’s valid,” he said.

The home affordability crunch and rise of gig work like Uber driving has increased interest in these types of mortgages, he said. 

Contract workers can alternatively seek financing from the private non-qualified mortgage market where bank statements could be used to verify self-employment income, but Crescenzo said that has disadvantages related to government-related loans.

“Non QM requires higher downpayments and interest rates than traditional financing,” he said.

In the next couple years, regional demand for loans based on self-employment income could rise given the federal job cuts planned broadly at public agencies, depending on the extent to which court challenges to them go through.

Those potential borrowers will find it difficult to get new mortgages until they can establish more of a track record with their new sources of income, in most cases two years from a tax filing perspective. 

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