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9	Beginning of Presentation
10	AICPA Finances Analysis prepared by the Executive Committee CPAs Reforming Our Profession (“CROP”)
11	The Executive Committee of CPAs Reforming Our Profession has prepared the following report on the state of affairs of the AICPA, its finances and related business interests. The following is a summary of the AICPA’s own published facts and our related observations, questions and concerns.
12	"Our concerns include" Our concerns include: Financial liquidity Financial reporting issues Lack of transparency surrounding the use of controlled entities Conflicts of interest The selling of the AICPA name and reputation to CPA2Biz Investors
13	"CPAs Reforming our Profession" CPAs Reforming our Profession Who are we?
14	CPAs Reforming Our Profession (CROP) www.cpas4reform.com A group of volunteer CPAs and AICPA members with concerns for:
15	Objective This project’s objective is to analyze the financial statements and other public statements of management and the media to discern and raise questions, that in our opinion, should be addressed by a responsible Board of Directors (legally the AICPA Council) or which might be of interest to the membership of the AICPA or other parties relying on the Institute’s audited financial statements.
16	Opinions We have opinions and concerns, and sometimes they show. If we lacked either an opinion or concern, we would not have spent our time creating this report. However, we will attempt to limit our opinions to sharing our concerns or observations at the beginning of each section. From there, read the facts that we have presented, and form your own opinion.
17	Reference Materials
18	"Unless otherwise noted" Unless otherwise noted, the source of all stated numerical facts are from the six AICPA annual reports (1999 through 2004).
19	"The Institute moves to improve..." The Institute moves to improve the transparency, reliability and timeliness of the business reporting model. 2002 Annual Report, p2
20
21	As the chart indicates, there has been a significant erosion of assets under the control of the AICPA
22	The Quality of the “Net Assets” appears to be decreasing as well In 1998 consolidated Prepaid Expenses and Deferred Assets represented 15% of the AICPA’s Net Assets. At July 31, 2004 they represented 179% of the AICPA’s Net Assets. In Addition, over $5 million dollars of the AICPA’s Net Assets are now comprised of a Note and Interest Receivable from CPA2Biz. Calculated consistently with 1998 presentation
23	AICPA “Adjusted” Net Assets
24	Background Facts CROP’s Observation: That the AICPA’s annual audit report is a confusing combination of various entities, including a mixture of for-profit and not-for-profit entities. Without a schedule of consolidation and elimination, it makes the AICPA’s financial position very difficult to discern.
25	Background Facts Through 1999 the AICPA’s annual report was a financial consolidation of the following entities: The AICPA The Division for CPA Firms, consisting of: PCPS – Partnering for CPA Practice Success The AICPA Alliance for CPA Firms The SEC Practice Section The Accounting Research Association The AICPA Benevolent Fund The AICPA Foundation
26	Background Facts As of July 31, 2003 The Division for CPA Firms reported Net Assets (“Equity”) of $4,718,000. Beginning in 2004 The Division for CPA Firms Net Assets are included in the Unrestricted Net Assets of the AICPA per footnote 15, 2004 annual report.
27	Beginning in 2000 the AICPA began adding Consolidating Entities In 2000, CPA Portal, Inc. is added to the consolidated entities. In 2001, CPA Portal, Inc. is replaced by CPA2Biz, Inc. (“C2B”) In 2002, the AICPA purchased and consolidated EEI Training LLC. Its name was changed to NorthStar Conferences LLC.
28	Background Facts – CPA2Biz’s Acquisitions & Dispositions In 2001, C2B is consolidated into the AICPA’s annual financial reports. Acquisition activity recorded on C2B’s books include: CapPro, acquired July 2001, sold October 2002 to a Related Party Rivio, acquired, February 2002
29	Governance Assumptions CROP’s Observation: That the AICPA Council bears ultimate responsibility for the direction and decisions of the AICPA.
30	Assumptions regarding Control and Accountability AICPA senior management (“AICPAsm”) serves at the pleasure of the AICPA Board of Directors (“BOD”) Most members of the BOD serve either one, two or three year terms AICPAsm as been under the same leadership since 1995
31	Assumptions regarding Control and Accountability According to the bylaws of the AICPA, Council is the entity legally responsible for fulfilling the statutory obligations of a Board of Directors for the organization. The entity called the Board of Directors is, in fact, a standing executive committee serving the Council.
32	Assumptions regarding Control and Accountability Therefore, the Council members each must function as having the ultimate duty of ensuring proper conduct of the AICPA, proper reporting of its activities to the members and to governmental regulators, and the proper exercise of Board level of fiduciary obligations to the members, the profession and the public.
33	Governance Assumptions The BOD answers to the members of Council While the financial statements of the AICPA and consolidating entities may be reported as one, the AICPAsm, the BOD and Council’s FIRST fiduciary duty is to protect the interests of the membership of the AICPA, not the interests of C2B investors
34	Governance Assumptions The AICPAsm team designed, promoted and executed the AICPA’s foray into Internet technologies These forays were approved by the BOD, and on some levels, the Council These ventures include CPA Portal, Inc. & CPA2Biz, Inc.
35	Governance Assumptions Over the last five-to-six years the AICPAsm, with the approval of the BOD created the business models and reporting relationships between the AICPA and the related Internet portal companies.
36	Governance Assumptions Council and the BOD approved the creation of the For-Profit entity C2B (formally CPA Portal, Inc.) during FY 2000. AICPAsm are full time employees of the AICPA and their employment contemplates that all business efforts would be for or on behalf of their employer.
37	C2B Financial Impact on the AICPA CROP’s Concern: Significant expenses were incurred to start C2B. These activities, shown only as consolidated with the balance of the AICPA and other consolidating entities, make understanding the financial activities of the AICPA by itself, very difficult.
38	The financial impact of C2B on the AICPA and the AICPA’s consolidated financial statements We will now explore the impact of C2B on the AICPA, its cash flows, its obligations and its ability to serve the 334,635 dues-paying AICPA members of America
39	The impact of C2B on the Consolidated Entity Council has delegated control of C2B and its activities. They remain responsible for C2B’s financial results and its impact on the AICPA, its members, and the profession. “Consolidated financial statements should not be used in those circumstances in which there is significant doubt concerning the parent’s ability to control the subsidiary” 2004 Miller GAAP Guide, p 8.02.
40	An Analysis of Operating Revenues and Expenses before and during the C2B era The following charts are of data taken from the annual reports, 1999 through 2004. Charts are of the Total Operating Revenues and Total Operating Expenses.
41	Consolidated Operating Revenues
42	Consolidated Operating Expenses
43	Consolidated Operating Revenue & Expenses
44	Annual & Cumulative Operating Losses
45	Revenue Analysis CROP’s Concern: While spending $65 million of investors’ money to build a better marketing model, the only significant increase in Revenues has come through increased dues from a static membership.
46	From the 2000 Annual Report, p15
47	Operating Revenues increased during the period 1998 - 2004 Annual Revenues increased $14 million or 9.8% during this period Based upon the detail in the annual reports, we have broken the income lines into two groups. Blue – AICPA Revenue areas, including Dues, Investment activity, Contributions and Exam revenue. Yellow – Revenues mostly related to areas transferred to C2B
48
49	AICPA Revenues vs. Revenue Items associated with C2B
50
51	Dues increases have driven Overall Revenue Increases
52	AICPA Only Dues (Total $)
53	AICPA Only Dues (Average per member)
54	AICPA Membership
55	% Change AICPA Dues & Membership
56	Growth Chart by Revenue Area
57	Expense Analysis CROP’s Concern: Funds spent in the Member Services area has actually decreased significantly since 1998 during a period of member dues increases.
58
59	Operating Expenses by Area
60	Program Services Expense
61	Member Services Expense
62	Supporting Activities Expense
63	Total Operating Expenses
64	Balance Sheet Issues CROP’s Concern: C2B has obfuscated the financial statements as they relate to the AICPA. Without disclosure of C2B’s stand-alone financial statements, or a schedule of consolidations and eliminations, it is difficult to understand how deeply C2B has directly affected the AICPA’s financial stability.
65	An Analysis of the consolidated balance sheets before and during the C2B era
66	Components of Assets
67	Change in Components of Assets
68	Components of Liabilities
69	Change in Components of Liabilities
70	Components of Preferred Stock and Net Assets
71	Changes in Components of Preferred Stock and Net Assets
72	Cash & Marketable Securities CROP’s Concern: That there has been a significant decline in liquidity which potentially signals a pending liquidity crisis.
73	Cash & Marketable Securities In 1998 Marketable Securities represented 181% of Annual Dues Revenue In 2004 Marketable Securities dropped to only 104% of Annual Dues Revenues Number of Days’ Expense coverage dropped from 260 to 168 over the comparable period These financial indicators point to a declining ability meet current obligations as they become due
74	Schedule of Decline in Cash & Marketable Securities
75	Comparison of Net Cash and MS to Member Dues Revenues
76	Days’ Expenses in Cash & Marketable Securities (net of LOC)
77	Deferred Costs and PP Expenses CROP’s Concern: In six years this account has grown from $5.5 million to $47.7 million and now exceeds the Net Assets (Equity) of the AICPA.
78	Deferred Costs & Prepaid Expenses
79	Deferred costs and prepaid expenses
80	Goodwill CROP’s Concern: Significant intangibles, initially valued during the dot-com era, remain on the balance sheet. It appears that this account was created primarily through C2B acquisitions. Most financial analysts deeply discount the value of Goodwill.
81	Goodwill and Other Intangible Assets
82	Capital Assets CROP’s Concern: Capital Assets have been consumed since 1998. The AICPA has not kept pace with its capital spending by replacing capital assets as they depreciate. Net Capital Assets in 2004 are approximately one-half of 1998 levels.
83	A look at investments in capital assets to serve the members
84	Depreciation & Amortization charged against those assets
85	Net Depreciable Assets deployed to Serve Members
86	A/P and Other Liabilities CROP’s Concern: This category has increased significantly, even after adjusting for $19 million of accrued C2B preferred dividends. Current liabilities eventually consume Cash, which appears to be declining, even as A/P and Other Liabilities increase.
87	Accounts Payable and Other Liabilities
88	"Included in Accounts Payable and..." Included in Accounts Payable and Other Liabilities are accruals for the C2B Cumulative Preferred Stock Dividend. This liability must be paid before any money can flow to the Common Stockholders of C2B. AICPAsm has stated to Council that these are not likely to be paid. Additional Preferred Dividends accrued but not paid: 2001 $1,933,302 2002 $5,435,327 2003 $5,949,282 2004 $6,199,000
89	Accrued C2B Preferred Dividends in Account Payable and Other Liabilities
90	Break out of Accounts Payable and Other Liabilities
91
92	Unearned Revenues CROP’s Concern: We would expect the relationship of Unearned Revenues to Total Revenues to remain relatively constant. A decline in this indicator could be the result of a change in revenue recognition policies.
93	Unearned Revenues
94	Unearned Revenues Analysis From 1998 to 2004 Unearned Revenues dropped 40.8% while Operating Revenues increased 9.7%. Unearned Revenues as a percent of Operating Revenues decreased from 13.9% to 7.5%. Of the total $8.2 million decrease, $6.4 million occurred between 2002 and 2004.
95	Unearned Revenues
96	Unearned Revenues (as a percent of Operating Revenues)
97	Unearned Revenues
98	It is time to take a break !! You have covered a lot of ground. Sit back and relax. Give your eyes a break on the next slide, compliments of the Ritz Carlton, Maui.
99
100	Capitalization of C2B CROP’s Comments: The capitalization is rather complex. Following are schedules summarizing the activity in each class of stock pulled from data scattered throughout the annual report footnotes. Some of the descriptions and company names are from articles in the media or the C2B web site.
101	Capitalization of C2B After the formation of C2B in FY 2000, common stock ownership was allocated 90.00% to the AICPA, 5.15% to unnamed “co-founders” and 4.85% to selected AICPAsm (AICPA senior management). At July 31, 2000, $170,702 had been paid (most of the cash from AICPAsm) for the outstanding common stock. During the next two fiscal years over $65,000,000 of cash was raised within C2B.
102	Capitalization of C2B There are three classes of active ownership in C2B Common Stock Preferred Stock, Series A Preferred Stock, Series B In February 2002 all stock classes split 400-1 The preferred stock carries an 8% cumulative dividend which must be paid before any common stock dividends can be paid. All preferred stock is convertible to common stock at the option of the holder.
103	Capitalization of C2B - Stock Series B preferred stock carries similar terms to the Series A preferred stock except it is junior to the Series A preferred stock in the case of liquidation and payment of dividends. In the annual reports the AICPA has shown the unpaid but accrued dividends as a liability (as previously discussed) and as a reduction of Capital raised from the offerings. Summaries of the three stocks follow
104
105	Capitalization of C2B Series A Preferred Stock
106	Capitalization of C2B Series B Preferred Stock
107	Capitalization of C2B Total Preferred Stock
108	Capitalization of C2B Total Capitalization – 7/31/2004
109	Control of C2B CROP’s Concern: Control of C2B goes to the heart of many issues involving the financial reporting. At a minimum, we believe that there appear to be many contractual stipulations concerning ownership and control that have not been adequately disclosed.
110	Control of C2B Based upon information in the annual reports (as scheduled previously), the AICPA owns 36,000,000 of the 50,184,125 common shares outstanding, or 71.74%. “At July 31, 2004, the AICPA has approximately 56% of C2B’s voting rights.” 2004 Annual Report, p17
111	Control of C2B Specific details of the Preferred Stockholders rights to conversion are not included in the financial statements. FASB 129 would appear to require disclosure of all pertinent details of rights and privileges of all classes of stock. This is particularly true of conversion rights.
112	Who really controls C2B? “3. Article VI(4)(c)(v) of the Corporation’s Restated Certificate of Incorporation is hereby amended to read in its entirety as follows: (v) enter into any single transaction or series of related transactions with a value equal to or greater than one hundred thousand dollars ($100,000) on an annual basis, other than employment agreements on a basis consistent (continued next slide)
113	Control of C2B continued from prior slide – with past practice, with any officer, director or beneficial owner of five percent (5%) or more of the Common Stock or any affiliate of any of the foregoing without the approval of a majority of disinterested directors;…” From Paragraph 3 “Certificate of Amendment to Restated Certificate of Incorporation of CPA2Biz, INC.” filed 11/15/2002, Delaware Sec. of State
114	C2B Investors CROP’s Observation: The amount of outside investment in C2B varies in the media by reporting source. However, even C2B does not report an amount consistent with the footnote data in the audit report.
115	Investors in C2B Cash Received
116	Microsoft / Thomson Investment “The Aon investment comes on the heels of a $50 million investment by Microsoft and The Thomson Corporation to assist CPA2Biz in providing small businesses with valuable Internet services and content to make their core business processes easier. “ https://www.cpa2biz.com/Corp/Press+Releases/PR_Aon_01May01.htm Viewed April 30, 2005
117	Microsoft / Thomson Investment Is it $40 million or is it $50 million? This is a statement made by CPA2Biz (an entity controlled by the AICPA) to the public.
118	C2B Financial Summary CROP’s Observation: C2B appears to have been an economic disaster. The investors’ money is gone. Dividends accrue to investors at a rate exceeding 40% of the entity’s Gross Revenues. For some reason AICPAsm continues keep it alive through renegotiated service contracts and extending loan repayment terms.
119	C2B Financial Summary
120	AICPA Funding of C2B CROP’s Concern: AICPA management tells Council and its members that it does not fund C2B while it renegotiates contracts with C2B, purchases assets and liabilities from C2B, takes a note receivable from C2B, and then one year later extends the repayment term of the note. The note and accrued interest due to the AICPA now approximate $5 million.
121	AICPA Funds C2B Cash Needs Our analysis demonstrates that through 7/31/04, C2B has posted losses in excess of cash raised. It would appear to be important for members of Council to understand how C2B has managed to fund these losses, especially when the AICPA financials appear to demonstrate that substantial amounts of liquidity are being funded by the AICPA. Three activities warrant further disclosure.
122	AICPA Funds C2B Cash Needs Amended Revenue Agreement between the AICPA and C2B, executed July 2002. The AICPA’s purchase and assumptions of “certain” assets and liabilities of C2B. The receipt of a Note Receivable to the AICPA from C2B for $4,344,000, representing the amount by which the AICPA overpaid for the recorded value of the assets and liabilities obtained.
123	Amended Revenue Agreement CROP’s Concern: This agreement, and the decision to keep C2B alive should have been fully disclosed to Council. We found no mention of this agreement or negotiations of the agreement in the AICPA’s Board Minutes of July 2002.
124	1) Amended Revenue Agreement “In January 2001, the AICPA and C2B entered into an agreement (“the Agreement”) which gave C2B exclusive rights to market, sell and distribute substantially all of the commercial products of the AICPA and other third-party products.” …….. …….”Effective July 2002, the Agreement was amended (the “New Agreement”) to modify the relationship between the AICPA and C2B.” 2003 Annual Report, footnote 12, p27
125	1) Amended Revenue Agreement The amended revenue agreement was announced in July of 2002. Negotiations between C2B and Shared Services, LLC broke down in Spring 2002, apparently disrupting the business plan for which outside investors, relying on the AICPA Senior Management, invested over $65,000,000.
126	The impact on the AICPA of the “New” C2B Agreement The impact on the AICPA was not immaterial. C2B comparable 2001 Revenues disclosed in the AICPA financial statement footnotes for 2002 were adjusted downward by $18,616,000. The only explanation given was “(A) Restated for comparative purposes due to amended agreement.” 2002 Annual Report, footnote 12, p41
127	The impact on the AICPA of the “New” C2B Agreement “Leslie Murphy, Chair of the Finance Committee, reviewed the financial results for the three months ended October 31, 2002. She noted it was difficult to compare current operations to the budget approved by Council since the AICPA/CPA2Biz contract had been negotiated subsequent to the approval of the budget by Council. She said even though there is a current deficiency in revenue over expenses, management is committed to meeting the original breakeven budget.” December 2002 AICPA BOD minutes
128	The impact on the AICPA of the “New” C2B Agreement In Calendar year 2002 the AICPA Board met: February 7-8, 2002 April 18-19, 2002 July 11-12, 2002 September 12-13, 2002 December 5-6, 2002 Based upon our reading of the published minutes for this period, the only meeting not including a “CPA2Biz Update” was July 11-12, 2002. This was a time when C2B was going through a major transition. Should members be concerned whether both the BOD and Council were fully informed?
129	Amending the Amended (2003) CROP’s Concern: In July 2002 the AICPA / C2B revenue agreement was amended with the AICPA taking a note receivable from C2B. One year later the note was amended, extending repayment terms at the same time the AICPA was announcing that C2B would be cash-flow positive the following year. Comments made in the Board Room appear to contradict public “talking points”.
130	The impact on the AICPA of the “New” C2B Agreement – Was it enough? July 2003 - “Ms. Murphy reported that the Committee also received a report from CPA2Biz. She said CPA2Biz was making progress and had reduced its “burn rate” to $100,000 per month and was projecting to have a cash position of $2.4 million at the end of the fiscal year. She said CPA2Biz was still investing and adding functionality to its website, and was close to finalizing the renegotiation of two outstanding notes. Ms. Murphy said CPA2Biz had requested a modification of its transition note with the AICPA due September 30, 2004. Upon a motion duly made and seconded, the Board authorized the Finance Committee to restructure the AICPA transition note with CPA2Biz (continued next slide)
131	The impact on the AICPA of the “New” C2B Agreement – Was it enough? (continued from previous slide) along the lines discussed at the meeting, subject to the completion of the restructuring of the two other outstanding notes.” July 11-12, 2003 BOD Minutes
132	Which is it? “Finally, Mr. Davis briefed the Board on CPA2Biz recent performance. He said CPA2Biz had reduced its operating loss in the fiscal year ending June 30, 2003 to $3 million as compared to a $33 million loss for the fiscal year ending June 30, 2002. He said CPA2Biz is projecting a cash-flow loss of $100,000 for the fiscal year ending June 30, 2004.” December 4-5, 2003 BOD Minutes
133	C2B / AICPA Rent Renegotiation CROP’s Concern: Was this a source of AICPA “funding” for C2B?
134	C2B Rent Adjustment Per the 2002 Annual report, Note 12, p38, referring to the “Old” C2B agreement, “Additionally, C2B leased office space from the AICPA in New York and New Jersey at an annual rental of approximately $3,068,000.” Later, describing the “New” agreement, “In addition, C2B will lease office space from the AICPA in New York and New Jersey at an annual rental of approximately $271,000.”
135
136	AICPA purchase of C2B Items CROP’s Concern: It appears that items were transferred at recorded cost, not fair value even though the entities have different ownership. We cannot discern the amount of cash that changed hands. We are concerned that the economic substance of this related-party transaction is masked through elimination and consolidation.
137	2) AICPA’s purchase of certain C2B Assets & Liabilities “The AICPA purchased, at recorded value, certain operating assets and assumed certain liabilities from C2B. The recorded value of the liabilities assumed exceeded the value of the recorded value of the assets received by $4,312,000. Accordingly, the AICPA received a note for such amount from C2B which has been eliminated in combination. 2002 Annual Report, footnote 12, p38
138	AICPA’s purchase of certain C2B Assets & Liabilities “As of July 31, 2003, the outstanding principal balance of $4,344,000 and accrued interest thereon of $377,000 have been eliminated.” 2003 Annual Report, footnote 12, p27 It would appear that the details of this transaction, the total cash transferred from the AICPA to C2B, and the assets and liabilities transferred have been effectively masked from the reader of the AICPA’s financial statements. The note amount changed between the 2002 and 2003 footnote.
139	2) AICPA’s purchase of certain C2B Assets & Liabilities The 2003 footnote only discloses the amount by which the AICPA “overpaid” for the assets acquired and accordingly received a note from C2B in the amount of $4,344,000. (in the 2002 footnotes, the note amount was listed as $4,312,000)
140	AICPA Receipt of $4.3M C2B Note CROP’s Concern: We would like to understand how accepting a material Note Receivable from a controlled entity is not considered “funding”.
141	3) Receipt of C2B Note Receivable
142	Who would be responsible?
143	$1.7M Surprise AICPA Loss CROP’s Concern: The loss increased during the same time the C2B agreement was renegotiated. With all of the CPAs on staff and on the Board, we don’t understand the timing and circumstances of a surprise this size.
144	2002 Actual vs. Forecast Projections and discussions of the AICPA’s 2002 budgeted income and expenses took many forms as reported to the BOD and recorded in the minutes. February 2002 – “currently forecasts a loss of $3,000,000 which is consistent with the budget”
145	2002 Actual vs. Forecast April 2002 – “currently forecasts a loss of $3,300,000 as compared to a budgeted loss of $3,000,000.” July 2002 – “continues to reflect an excess of operating expenses over operating revenues of $3,300,000, including the $1 million budgeted gain on marketable securities.” (later suggests the $1M is unlikely given market conditions).
146	2002 Actual vs. Forecast Sept 2002 – “excess of expenses over operating revenue of $5.3 million, as compared to a budgeted excess of expenses over revenue of $4 million and a prior forecast of $4.3 million.” Sept 2002 – “As a result, the AICPA has a preliminary loss of $12.4 million for the year. The actual audited decrease in Net Assets for the AICPA for 2002 was shown as $13.135 million.
147	Summary of Data presented to the BOD regarding AICPA 2002 Income
148
149	Which is it? Page 24 of the AICPA 2002 Annual report lists major unanticipated costs for the operating deficit. One of those costs cited is the cost of “renegotiating the AICPA/CPA2Biz agreement.” Did both the cost of renegotiating the C2B contract and the cost of the renegotiated C2B contract contribute to additional “unexpected” AICPA losses for 2002?
150	AICPA Business for C2B Investors CROP’s Concern: Investors who lost their investment in C2B appear to be lining up at the AICPA’s doorstep and receiving handouts. This is a serious matter when it involves bestowing preferred provider status on companies that CPAs rely on to handle retirement funds.
151	AICPA business for C2B investors “Lisa German, Chair of the Member Retirement Committee and Jay Rothberg, Vice President – Office of the CEO, provided the Board members with background information and reviewed the Committee’s due diligence study of ITS Member Retirement Program. The Committee recommended that the AICPA change the provider of its Member Retirement Program from T. Rowe Price to Nationwide” (continued on next slide)
152	AICPA business for C2B investors (continued from previous slide) “The new plan would include a prototype AICPA Member Retirement Trust as well as customized plans and trusts offered at preferred pricing. It would enable participating firms and companies to do their own administration and select from multiple fund families. Upon a motion duly made and seconded, the Board approved the committee’s recommendation to select Nationwide as the provider for the AICPA Member Retirement Program.” AICPA BOD Minutes, July 2002
153	AICPA business for C2B investors Four months after Nationwide Financial Services invested $7,500,000 in C2B, the BOD selects Nationwide as the provider for the AICPA Member Retirement Plan. At the time Moody’s rated Nationwide’s Senior debt A2. (more on this later)
154	AICPA business for C2B investors April 14, 2003 AICPA Names Nationwide Financial 'Preferred Provider' Nationwide becomes Institute's preferred provider of retirement savings plans for CPA clients. Earlier this year, the AICPA chose Nationwide Financial as the exclusive provider of two retirement programs for its member firms and their employees. https://www.cpa2biz.com/News/News+from+Partners+and+the+Profession/AICPA+Names+Nationwide+Financial+Preferred+Provider.htm (viewed 5/01/2005)
155	The AICPA, C2B and Nationwide “New York (May 6, 2002) – Nationwide Financial has invested $7.5 million in CPA2Biz in exchange for positioning as a preferred provider of 401(k) products and services for the Web portal’s 18 Capital Professional Advisor companies” AccountingTechnology http://www.webcpa.com/article.cfm?articleid=1936&searchTerm=Nationwide%20Financial%20has%20invested%20$7.5%20million%20in%20CPA2Biz%20in%20exchange
156	The AICPA, C2B and Nationwide July 2002 - “Upon a motion duly made and seconded, the Board approved the committee’s recommendation to select Nationwide as the provider for the AICPA Member Retirement Program” AICPA BOD minutes, July 2002 "Also, C2B intends to sell a subsidiary and has negotiated a binding letter of intent with a related party. Upon completion of the sale, management of C2B estimates that at least $2,153,000 of cash will become available to repay long-term debt (see Note 8)" AICPA 2002 Annual report, p41 (July 31, 2002)
157	The AICPA, C2B and Nationwide as reported by Accounting Technology April 2003 – “In January, the AICPA chose Nationwide as the exclusive provider of two qualified retirement programs for its member firms and their employees.” AccountingTechnology “Columbus, Ohio (April 8, 2003) – Further cozying its relationship with the financial services giant, the American Institute of Certified Public Accountants said it is endorsing Nationwide Financial Services as a preferred provider of retirement savings plans for CPA clients” Accounting Technology
158	The AICPA, C2B, Nationwide & CapPro April 2003 – “Last May, the company (Nationwide) invested $7.5 million in the AICPA’s struggling Web portal, CPA2Biz, in exchange for positioning as a preferred provider of 401(k) products and services for the portals 18 Capital Professional Advisor companies. At the time, CapPro was a wholly owned subsidiary of CPA2Biz. CapPro left CPA2Biz to form an independent venture in November” AccountingTechnology Nationwide was the related party which purchased CapPro from CPA2Biz in October 2002.
159	AICPA business for C2B investors If AICPA members were to do their own research at Moody’s, AM Best, and other rating services they would find that while Nationwide (Symbol: NFS) is good, it is NOT “Top of Class” as judged by independent rating agencies. On December 3, 2002, Moody’s downgraded Nationwide’s Senior Debt rating from A2 to A3 status, putting its debt in the LOWEST of seven A-Rated categories. Some of their other debt instruments are rated Baa1, Baa2 and Baa3, while S&P lists Nationwide overall as A-, with debt instruments rated between A- and BBB.
160	Moody’s Rating System Investment Grade
161	Moody’s Rating System Speculative Grade
162	Ratings Summary for the AICPA’s Preferred Provider
163	AICPA business for C2B investors From the Nashville Business Journal, January 21, 2002: “An initial contract for computerizing the CPA exam was thrown out after objections were raised about the lack of involvement by the Nashville-based National Association of State Boards of Accountancy. Prometric, a computer-based testing and assessment services company based in Baltimore, and the American Institute of Certified Public Accountants were the original parties to the contract” “Costello (president and CEO of NASBA) says there were conflict of interest concerns because The Thomson Corp, headquartered in Toronto, is an investor in CPA2Biz, a portal of the AICPA, and The Thomson Corp. owns Prometric.”
164	AICPA business for C2B investors From the Nashville Business Journal, January 21, 2002: “Under the new contract, NASBA and AICPA will essentially maintain their previous roles in the CPA exam process. For the first time in the history of the CPA exam, a commercial entity -- Prometrics – is involved as a party in the contract. The computerized exam will be delivered at Prometric centers or state board of accountancy centers.” Costello says the new contract is worth more than $500 million over 10 years to the three parties.”
165	"“Taking the exam by..." “Taking the exam by computer increases its cost by about $300. The first-time CPA exam previously cost about $275 in Maryland.” It’s official: Computerized CPA exam comes to town Baltimore Business Journal (online) Week of April 5, 2004
166	AICPA business for C2B investors All does not appear to be going well with the AICPA’s launch of the computerized examination. The following is from the Board Minutes as Craig Mills describes the new exam to the Board of Directors in October 2001, followed by details from the 2004 audit report.
167	AICPA business for C2B investors “Mr. Mills reported it is currently estimated the development and implementation of the computerized CPA examination will cost about $19.5 million, of which $10 million will be financed by an interest-free loan from Prometrics'. A large portion of the $19.5 million will be capitalized. The guidelines are still being developed by the AICPA finance, accounting standards and examinations teams in consultation with J.H. Cohn.“ BOD Minutes, October 2001 “Through July 31, 2004 approximately $29,527,000 of costs have been incurred, all of which were initially deferred.” 2004 Audit Report
168	AICPA business for C2B investors Further from the 2004 audit report: “Fees are payable to Prometrics by the AICPA in accordance with a tiered volume based pricing schedule. At the conclusion of the first year of testing (April 2005), the actual number of test hours will be calculated to determine the final quantity adjusted pricing for the year. The AICPA currently projects it may be required to pay up to $3,500,000 in fiscal 2005, based upon the volume to date and fiscal 2005 projected volume. The full $3,500,000 plus interest is recoverable from future fees under the terms of the agreement.”
169	AICPA business for C2B investors From the July 2004 Board of Directors Minutes: “Leslie Murphy, Finance Committee Chair, reported on the launch of the Computer- Based Uniform CPA Exam. She said the exam was drawing strong positive reviews, but participation was not meeting the cash flow projections. She said this issue would be discussed in greater depth by the Finance Committee at its September meeting.”
170	AICPA business for C2B investors From the September 2004 Board of Directors Minutes: “She reported, however, the number of candidates was not meeting the budgeted breakeven projections. She said the Finance Committee had approved raising the candidate fee by $10 per section to $55 per section. After discussion, upon a motion duly made and seconded, the Board approved the fee increase.” While shortfalls in exam-takers and the $3.5M liability were discussed at the 2004 Fall Council in October, CROP members in attendance do not recall ANY mention of the fee increase.
171	AICPA business for C2B investors From the December 2004 Board of Directors Minutes: Mr. Anderson said that because of the lower number of exam takers for the Uniform CPA Examination, the Institute would need additional borrowing for the Uniform CPA Examination. He said Clarence Davis would be exploring both short and long-term borrowing options and the Finance Committee and Board of Directors would likely need to hold conference call meetings in mid-January 2005 to decide on which option to pursue.
172	AICPA business for C2B investors “The agreement provides for the AICPA to break-even with regard to costs incurred in developing and maintaining the Examination. Through July 31, 2004, approximately $29,527,000 of costs have been incurred, all of which were initially deferred. During the year ended July 31, 2004, the AICPA recognized revenue of approximately $1,636,000. Accordingly, costs equal to the revenue recognized in the current year have been expensed.” Footnote 8, 2004 Annual Report
173	AICPA business for C2B investors This raises interesting questions. Were there costs incurred to maintain the content of the examination? 100% of the Revenues recorded were applied to reduce the Deferred Costs. If so, where are the balance of the costs allocated?
174	Drop in Affinity Revenues CROP’s Concern: This is money that funds AICPA activities. Has the value of marketing to AICPA members dropped this dramatically or have Affinity Revenues been diverted? In a related issue, why are non-CPAs now allowed into the AICPA insurance pools?
175	Drop in Affinity Revenues Affinity Revenues include the Revenue the AICPA receives from “preferred providers” who are allowed access to market their goods and services to AICPA members. This revenue, as reported to Council, decreased significantly after 2002.
176	Drop in Affinity Income
177	An Affinity Income Issue “Upon a motion duly made and seconded, the Board approved offering the CPA Life Insurance plan to non-CPA members of the Association of Certified Fraud Examiners.” Board Minutes, July 2004
178	Acquisitions & Divestitures CROP’s Observation: Did the flurry of activity in this area deflect resources from other important issues attacking our profession at this time?
179	Acquisitions and Divestitures C2B Made two significant acquisitions, CapPro in July 2001 and Rivio in February 2002. CapPro acquisition, from p35 of the 2001 Annual Report: “In July 2001, C2B acquired all the outstanding shares of a financial services firm. The purchase price of $4,000,000 consisted of the issuance of a $3,000,000 note, the issuance of 980 shares of Common Stock and approximately $860,000 of other direct acquisition costs.” In 2002 an additional $1,050,000 was added to Capital and Goodwill.
180	Acquisitions and Divestitures Rivio acquisition, from p40 of the 2002 Annual Report: “In February 2002, C2B acquired all the outstanding shares of Rivio, a provider of Web-based business operation tools for small businesses, in exchange for the issuance of 3,910,310 shares of Series B Preferred Stock, 10,031,791 shares of Common Stock and vested stock options to purchase 1,543,508 shares of Common Stock at an exercise price of $.3902 per share through February 2012.”
181	Rivio CROP’s Concern: Was this merger driven by Microsoft? Rivio was only three years old when acquired by C2B, but it had already lost $61,000,000.
182	More about Rivio Jan. 22, 2001 – Microsoft Corp. and Rivio Inc. (formally Biztro, Inc.) today announced an alliance to deliver managed applications built on the Microsoft Windows 2000 and .NET platforms. http://www.microsoft.com/presspass/press/2001/jan01/01-22RivioPR.asp Rivio Inc. (formally Biztro, Inc.), headquartered in Santa Clara, Calif, was founded in 1999…..” http://www.microsoft.com/presspass/press/2001/jan01/01-22RivioPR.asp
183	More about Rivio Microsoft created an alliance with Rivio the same month it announced its investment in C2B. Thirteen months later, C2B, with Microsoft as an investor, acquires Rivio. In the three years of Rivio’s existence before it was acquired by C2B in 2002, Rivio generated a Tax Net Operating Loss Carry forward of approximately $61,000,000.
184	CapPro CROP’s Concern: This is another company with a prior history of losses. This acquisition somehow managed to generate a $5.6 million book gain when it was sold to a related party that had just been named an AICPA preferred provider of retirement plans.
185	More about CapPro Prior to acquisition by C2B, CapPro had generated a Tax Net Operating Loss Carry forward of approximately $6,000,000. During 2002 CapPro lost $3,057,000. In 2003, during the three months before its sale in October of 2002, it lost an additional $727,000. CapPro also had a $3,000,000 secured Note Payable with significant payments coming due.
186	More about CapPro From the facts given, CapPro never made money, lost money the entire time it was a part C2B and was attached to a $3,000,000 obligation that required cash to fund. The 2003 consolidated income statements of the AICPA include $5,602,000 of income from discontinued operations related to CapPro. 2003 Annual Report, Pages 19 and 29 Does this transaction needs better disclosure for adequate transparency?
187	More about CapPro The purchaser of CapPro “paid” $7,693,725 plus assumed the $3,000,000 Note Payable. (The $3,000,000 note payable, per footnote 8 was eliminated between 2002 and 2003). However, the purchaser did not give C2B a check for the purchase amount, it gave no cash. In fact it RECEIVED cash of $1,346,000 as part of the transaction.
188	More about CapPro “In October 2002, C2B completed the sale of CapPro to an investor (the “Purchaser”) that held 553,499 shares of C2B Common Stock and 1,446,849 share of Series A Preferred Stock, (collectively called the “Equity Interests”). The Purchaser exchanged all of its Equity Interests which had a fair value of $7,693,725 at the date of the exchange for the common stock that C2B held in CapPro.” (continued on next slide)
189	More about CapPro (continued from previous slide) “The sale of CapPro was a noncash transaction and, accordingly, is not reflected in the accompanying statement of cash flows.” 2003 Annual Report, p29 Cash retained by CapPro upon Disposition... (1,346) From Combined Statements of Cash Flows (in ‘000s) 2003 Annual Report, p21
190	Summary of Equities Transferred for CapPro
191	More about CapPro Who was the white knight that stepped up and offered $10.7 million ($7.7M in equities and $3.0M in assumed debt that was coming due, negotiated down to $2.153M) for a company that was losing approximately $250,000 per month over a 15 month period? Answer: Nationwide Financial Services
192	Stock Valuation used for CapPro CROP’s Concern: Do the valuations used reflect fair market value and if so, how were they determined?
193	More about CapPro An accounting question involves the valuation of the stock traded by Nationwide for CapPro. The AICPAsm, the BOD and the AICPA’s auditors allowed C2B to value Series A Preferred stock received for CapPro at approximately Nationwide’s original purchase price when exchanged for CapPro. This generated a $5,602,000 gain on disposition, materially improving the consolidated financial results.
194	2002 C2B Going Concern Language “As shown above, since inception C2B has suffered significant losses and at July 31, 2002 has a common stockholder’s deficiency of approximately $74,000,000, which has been primarily funded by the preferred stockholders. Based on these factors, C2B may be unable to continue as a going concern.” From the 2002 Annual Report, footnote 12, p41
195	2003 C2B Liquidity Language “Management of C2B believes these initiatives will provide sufficient cash flow for the next twelve months. However, if C2B’s 2004 financial results do not meet or exceed its cash flow projections, management believes that they have contingency plans to mitigate decreases in revenue through concomitant reductions in expenses. Nevertheless, if revenues were to be substantially lower than anticipated or expenses substantially higher, there is a possibility that the available cash resources may not be sufficient for C2B’s cash requirements.” From the 2003 Annual Report, footnote 12, p30
196	More about CapPro We question how the value of C2B’s Series A Preferred Stock could retain its value from February 2002 to October 2002 after the C2B business model and its opportunity for an IPO collapsed during the Spring of 2002.
197	More about CapPro CPAs understand that estimates of valuation can materially alter financial results. CPA members of Boards have a special obligation to understand the basis of these values. The C2B stock value has repeatedly constituted a material part of the entity's financial representations. Council is ultimately responsible for the propriety of these representations.
198	More about CapPro & C2B “In late 2002, a new management team restructured CPA2Biz’s revenue model and realigned its business plan. In 2003, CPA2Biz’s net loss was reduced 90.5%, from 33.8 million in 2002 to $3.2 million in 2003.” 2003 Annual Report, p15
199	More about CapPro & C2B These reassuring words were predicated upon financial results which included a $5.6 million non-cash gain from a sale to a related party, based upon the valuation of the related party’s C2B stock. While the deal was pending, the related party received an AICPA endorsement as a preferred provider to the AICPA membership.
200	Other C2B Common Stock Values CROP’s Concern: Stock valuations fluctuated greatly.
201	Various C2B Stock Valuations From the inception of C2B, equity transactions have been recorded using a range of per-share prices, especially the Common Stock.
202	Various C2B Stock Valuations
203	Various C2B Stock Valuations
204	Various C2B Stock Valuations
205	New MSP Initiative CROP’s Concern: This appears to be a reincarnation the C2B initiative that failed to win approval by state societies in the Spring of 2002. MSP has failed to implement as planned, causing financial repercussions.
206	The New MSP Initiative “As SSLLC (Shared Services, LLC) has not had operating revenue since May 2002, the AICPA has written down its equity investment of approximately $335,000 in SSLLC to zero at July 31, 2002” “In June 2002, the AICPA agreed to fund SSLLC $150,000 for the months of August and September 2002. No additional commitments have been made subsequent to September 2002.” 2002 Annual Report, p42
207	The New MSP Initiative “We also moved forward with the Member Solutions Partnership (MSP), an initiative that will change the way we do business and provide service to our members. The overall goal for MSP is to create and upgrade business systems that will help us more effectively serve our collective AICPA and state society members.” 2003 Annual Report, p3
208	The New MSP Initiative “Its purpose is to design and deploy a state-of-the-art membership management and operations system to be implemented in fall 2003. The MSP is a collaborative effort between the AICPA and the state societies through the Shared Services, LLC joint venture.” 2003 Annual Report, p11
209	The New MSP Initiative Though few details were given, the new initiative appears to be similar to the program initiated by CPA2Biz between the SSLLC and State Societies which was abandoned in 2002.
210	The New MSP Initiative “The external development budget for the project is $10.2 million and $5.8 million has been incurred through July 31, 2003. $5.5 million has been capitalized and $0.3 million has been expensed. The system, which is on budget, is expected to go live in Fiscal 2004 with two pilot states and the AICPA.” 2003 Annual Report, p14
211	The New MSP Initiative “Upon motion duly made and seconded, the Board approved moving forward with the BSP project. “ February 2003 BOD Minutes By July 31, 2003 $5.8M had been spent on this project. 2003 Annual Report Note - The April 2003 Board minutes refer to this as the MSP. The 2003 annual report refers to this as the Members Solution Partnership. \|Sometime between February and April, the Business Systems Project (BSP) became the MSP.
212	The New MSP Initiative There was no comparable language regarding costs, budgets or percentages of completion in the July 2004 Annual Report. We assume it was not complete because from the July 2004 Board of Directors Minutes: “Clarence Davis, Chief Operating Officer, updated the Board members on the Member Solutions Project (MSP) implementation. He said the project was four months behind, but that measurable progress had recently been made. He said additional technology staff would be needed for this project in Fiscal 2004-2005.”
213	The New MSP Initiative Furthermore, at the Fall 2004 meeting of Council, the MSP program was cited as the reason for delayed dues billings, which caused the AICPA to draw upon its Line of Credit at July 31, 2004.
214	New EBR Initiative CROP’s Concern: Who are the stakeholders in the consortium? Based upon the AICPA’s recent history of managing C2B, we would like for Council to have more details.
215	Enhanced Business Reporting Initiative “Update from the Special Committee on Enhanced Business Reporting Mike Starr, Chair, Special Committee on Business Reporting Committee and Alan Anderson, Senior Vice President, Member and Public Interest, updated the Board on the Committee’s activities. (continued on next slide)
216	Enhanced Business Reporting Initiative Mr. Starr reported that the Committee revised its mission with a new objective of establishing a consortium with key stakeholders outside the AICPA rather than working collaboratively with these organizations inside the AICPA. He outlined the Committee’s next steps, overall plan of action and time line. He said the Committee planned to launch the Consortium by June 2005.” AICPA BOD minutes, July 10-11, 2003
217	Accounting & Reporting Issues CROP’s Concern: We believe that there are potential issues related to appropriate reporting under GAAP.
218	A Potential Accounting & Reporting Omission In 2002 there were Non-cash investing and financing activities totaling $23,950,000. We found no comparative schedule of these transactions in the 2002 Annual Report.
219	AICPA Accounting & Reporting Issues
220	AICPA Accounting & Reporting Issues Consolidation is not permitted unless there is control. Consolidation of dissimilar operations requires an explanation of the basis for the consolidation. Consolidation of not-for-profit and for-profit activities present special problems and require additional informative disclosure. Administration of the not-for-profit activities require a separate, full understanding of the not-for-profit operations.
221	AICPA Accounting & Reporting Issues Furthermore, there has been extremely limited disclosure of the consolidating activity between the AICPA and CPA2Biz. Separate, stand-alone financial statements of the AICPA and CPA2Biz, though requested, have NOT been made available to members of Council, nor has a schedule of consolidation showing inter-company activity and eliminations.
222	Sarbanes-Oxley and the PCAOB CROP’s Concern: Under current leadership, the AICPA’s role has been significantly diminished. The AICPA’s business practices were cited in Congressional testimony as a reason for removing the Accounting Profession from one of its traditional roles.
223	Others have questioned the AICPA / C2B relationship From testimony of Mr. Lynn Turner, Chief Accountant, Securities and Exchange Commission, 1998-2001. Delivered 10:00 a.m., Tuesday February 26, 2002, to the U.S. Senate Committee on Banking, Housing and Urban Affairs. He cited the AICPA / C2B relationship as a reason for establishing an SEC supervised public accounting oversight board. http://banking.senate.gov/02_02hrg/022602/turner.htm
224	From Lynn Turner’s Senate testimony “The AICPA creating a for-profit portal and web of business relationships called CPA2Biz, and along with a failed attempt at establishing a business consulting credential. It is difficult to understand how a not-for-profit organization can enter into this web of for-profit relationships and not create conflicts with the notion of being a public interest self-regulatory organization.”
225	Sarbanes-Oxley and the PCAOB From the 2004 Miller GAAP Guide, p vii-viii. “Congress passed, and President Bush signed into law, the Sarbanes-Oxley Act in the summer of 2002. This legislation is generally viewed as the most far reaching legislation affecting the accounting profession since the securities laws of the 1930s.”
226	2004 Miller GAAP Guide - Continued “The Sarbanes-Oxley Act is a direct result of the allegations of financial reporting fraud at a number of major corporations beginning in the fall of 2001 (e.g. Enron, Global Crossing, Qwest, Adelphia Communications, Tyco, and WorldCom). The outrage in the country to these allegations of financial reporting fraud was reflected by the overwhelming votes in favor or Sarbanes-Oxley in both houses of Congress. The Sarbanes-Oxley Act passed the Senate 99-0 and only three votes were cast against it in the House of Representatives.”
227	2004 Miller GAAP Guide - Continued “Among the more important provisions of the Sarbanes-Oxley Act is the creation of the Public Company Accounting Oversight Board (PCAOB). The PCAOB is responsible for overseeing all aspects of the public accounting profession related to audits of SEC registrants (hereafter called public companies.) Much of the AICPA’s self-regulatory efforts are obviated by the creation of the PCAOB.”
228	Obviate “to prevent, to do away with or prevent by effective measures; make unnecessary” Webster
229	AICPA Left Out April 14, 2004 - AICPA Left Out of PCAOB Advisory Board The PCAOB has formed a standing Advisory Group charged with assisting the board in setting standards. The AICPA, however, is conspicuously absent from the list of participants, which includes Big Four representatives and former chief accountants from the SEC and FASB. See: http://www.pcaobus.org/News_and_Events/News/Archive/2004-04-15.asp
230	AICPA Left Out The Board has also invited four organizations to participate as observers: the Financial Accounting Standards Board, the General Accounting Office, the International Auditing and Assurance Standards Board and the Securities and Exchange Commission. www.pcaobus.org/News_and_Events/News/Archive/2004-04-15.asp
231	Summary
232	Summary This section combines questions and conclusions. Has there been a breakdown in accountability between the AICPAsm, the BOD, the outside auditors and the Council? Have checks and balances at the AICPA been overridden?
233	Too Many Losses Based upon our review of published information, we ask if $108 million of lost Equity since 1998 is too much? Only $65 million of Cash came from outside investors. In addition, $18 million of Goodwill and Intangible Assets are now on the balance sheet, created primarily by companies with no history of profitable operations.
234	Too Many Losses Whether investor or member money, is a $108 million decline in Net Assets acceptable performance? If we, as accountants, believe in the integrity of financial reporting, then should we not be concerned? Do we not negate the very profession we practice to accept a material loss of this magnitude as unimportant and acceptable?
235	There has been no acknowledgement of failed initiatives or need for change Based upon our analysis, limited to publicly available information, there appear to be serious questions surrounding the management and governance of the AICPA. The renewal of the current leadership for an additional five years begs the question, “Is anyone responsible for these results?”
236	"We believe that the current..." We believe that the current course will continue to erode the influence and prestige of a once proud profession. If the profession is to survive with any degree of independence and self-rule is it not time to bring to an end this current era of trading for profit on the CPA label? Is it not time for the AICPA to return to its original purpose, serving its members and protecting the public interest?
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239	Contacts
240	Contacts If we have misstated any material facts, if any of our assumptions are incorrect or incomplete, we request that any reader notify us. Also, please forward general comments or impressions. We will not attribute quotes to any individual. Contact us at: comments@cpas4reform.com