Letters.

"Coping With Retirement" (JofA, Dec.99, page 67) ignores the most important benefit available to workers who retire before age 59 1/2 with 401 (k) plans and IRAs and need additional income to supplement their pensions before Social Security benefits kick in.

The article states most arrangements provide a penalty for distributions made before age 59 1/2 except in the case of disability.

However, there is another exception that can be found in IRS publication 590, Individual Retirement Arrangements. Commonly referred to as the "substantially equal periodic payments" exception, it allows an individual to withdraw money from a 401(k) or IRA without incurring the 10% early withdrawal penalty, but has the following restrictions:

* The payment must be the same monthly or annual amount.

* The payment must be based on a projected reasonable return of retirement plan investments as determined by historical performance.

* The payments must continue for 5 years or until the individual reaches age 59 1/2, whichever is the longer period. Otherwise, the 10% penalty will apply for any lump-sum and all other distributions except in the case of death or disability.

If the participant elects monthly distributions, the first payment will include a lump sum for the prior months in the first calendar year--for example, a person set up to receive $1,000 a month starting June 1 will also receive a $5,000 payment for the prior 5 months.

If the individual's retirement account investment continues to per form well during the time he or she is receiving the equal monthly payments--as it might have, for example, during the present bull market--at the end of the 5-year period, the principal investment might have remained intact or have increased.

Most early retirees are unaware of the provisions of publication 590. They continue to work to make ends meet because they think their retirement accounts are untouchable without incurring severe tax penalties.

Now that downsizing by corporations and resulting early retirements are commonplace, awareness of this tax benefit allows individuals to better cope with retirement.

In 1996 I retired early and needed additional income to supplement my pension until I could receive my Social Security benefits. When I discovered publication 590, I immediately took advantage of its early withdrawal provisions and set up my distributions. I'm glad I did.

John Soto, CPA, JD North Attleboro, Massachusetts

More Thoughts About Indexing

While the article, "The Quest to Outperform" (JofA, Jan.99, page 32) made some valid points about indexing, the author puts the cart before the horse.

The investment process does not begin by deciding what funds to invest in or whether or not to index. The process begins by identifying the client's risk tolerance, time horizon, asset class preferences (if any) and expected or needed return to reach a stated goal. Only when this has been completed should a search be done for suitable investments that encompass a portfolio customized to the client's needs. The main goal should be reaching the client's stated objective, not outperforming or matching the performance of an index.

Imagine a period when the S&P 500 returns 9% a year while the client's portfolio returns 10% a year. The client who needs 11% a year to retire may have beaten the index, but has not reached his or her goal.

The article also ignores risk-adjusted return. While many funds have recently underperformed the S&P 500, many also take less risk and are, therefore, more suitable for some less risk-tolerant clients. On the other hand, many funds take more risk and have the potential to significantly outperform the index, making them suitable for some more risk-tolerant clients.

While I'm sure the debate will continue to rage, I believe the investment process should be client driven and the adviser should approach a new client with an open mind. Only after an in-depth interview should a decision about investments be made.

Matthew Tuttle Stamford, Connecticut 

For Tax-Qualified Long-Term-Care Insurance

I read with interest "Buyer Beware" (JofA, Aug.99, page 27), but I believe the author's arguments against tax-qualified long-term-care insurance plans are outdated.

Based on my experience in the long-term-care industry, I present the following arguments for tax-qualified plans, which were not mentioned in the article:

* The IRS considers premiums paid for a tax-qualified plan as an unreimbursed medical expense. Unreimbursed medical expenses that exceed 7.5% of adjusted gross income are deductible. Married couples can include their tax-qualified LTC premiums with other unreimbursed medical expenses up to certain limits based on each spouse's age. Neither the IRS nor Congress has ruled on the deductibility of a nontax-qualified LTC plan's premium.

* Tax-qualified plan benefits are not taxed, except for per diem tax-qualified plans that pay benefits in excess of certain limits defined by the Health Insurance Portability and Accountability Act of 1996. The tax status of nontax-qualified plan benefits is uncertain.

* The way benefits are paid under a tax-qualified plan is time-tested. Clinical research indicates that assessments of an individual's ability to perform activities of daily living and of his or her cognitive functions are the most reliable and objective measures of the need for care.

* The 90-day physical impairment requirement discourages duplication of coverage.

* Tax-qualified plans meet extensive consumer protection measures. HIPAA provides federal long-term-care consumer protection provisions that non-tax-qualified plans do not have to meet in all states.

The bottom line is that most would not dispute the advantages of tax-qualified long-term-care insurance. This product is meeting the needs of consumers. While I know the debate isn't over, I think it is important to hear both sides of the issue.

Ronald Hagen Northwestern Mutual Life Milwaukee

Not All CPAs Cover the Same Territory

After reading "Who Are We as a Profession--and What Must We Become?" (JofA, Feb.00, page 81) I'm very concerned.

At this point, to be a CPA is to be multidisciplined. However no one person can be fully knowledgeable in all aspects of the profession. The point of the article seems to be that the world should see the CPA as the one "go-to" professional.

Isn't it time that "CPA" had more designations? For example, I wouldn't go to an MD without finding out whether he was a general practitioner or a heart or other specialist I might have a need for.

Currently the populace believes the CPA is someone they can go to for any accounting needs. However, not all CPAs understand to the same degree the varied issues. Most CPAs select one or two areas of interest and acquire an in-depth understanding of them. All other areas are of lesser interest, and CPAs may never update their knowledge base in some of them.

However, there are CPAs willing to provide a service for their clients without the education to do it justice just because the client relies on them.

I hope somewhere in the new vision there is an objective to educate the public that not every CPA has the answer to all their accounting or financial problems.

The accounting profession must be a leader of leaders in showing professionals of varied expertise how to accept their own limitations and in educating the public about the questions to ask to select the right CPA. Large CPA firms can provide multiple areas of expertise. However, the individual the client is directed to needs to be the right one for the job at hand. Small CPA firms cannot provide all the same services and should be held accountable when they imply--through omission--that they can do everything when talking to prospective clients.

Robert Lukey Mesa, Arizona 

Editor's note: Accreditation of specialized practice areas is one of the key mandates of the CPA Vision. The National Accreditation Commission (NAC), an AICPA committee formed to provide a means for identifying and advocating new areas of specialization that warrant an accreditation program, now offers the following accreditation programs with more to come: Accredited in Business Valuation (ABV), Information Technology accreditation (IT) and Personal Financial Specialist (PFS). For more information, see the AICPA Web site at www. aicpa.org and click on Accreditation and Specialization.

Analyzing the Difference

When I read "Hiring Generation X" (JofA, Feb.00, page 55), I wondered whether Gen-X expectations are really that different.

Gen-Xers do want more and will apply the leverage afforded them by a very strong economy and favorable demand vs. supply. So do I--just as I did when I got out of college 17 years ago. My first accounting job paid $21,000 annually--average at that time. Assuming that starting pay has increased at a rate of 3% for 16 years, the equivalent today would be $33,700, almost exactly the mean average salary for a staff accountant 1 (as shown in exhibit 3, "CPA Job Levels and Compensation," page 58, of the article).

One expects to be paid a premium for experience: The 3% annual increase is needed just to keep pace, but it would take twice that to compensate someone with even average experience. If you distinguish yourself by talent and very hard work, you'd probably average three times that for the first 15 years of your career. This has been a reasonable expectation in the past, and seems to be in line with current thinking as well. The numbers in the article (exhibit 3) appear to support this analysis.

To have achieved an audit or accounting director or controller position with an $85,000-to-$100,000 salary, with 15 to 17 years experience, means you've had to average about 10% in annual increases. Indeed, for a high achiever, increases with promotions totaling 15% to 30% annually in the first five-year period, averaging 10% to 15% annually in the second five-year period, and 7% to 10% in the next five have probably been the norm for 25 years.

Therefore, the article's assertion that professionals with three years of experience can command the same salary you worked 12 years to attain doesn't seem right unless you have been demonstrating remarkably mediocre performance for the past decade or unless the time value of money is ignored.

Perhaps perspective is the key difference. When I graduated, unemployment was 13%. Competition for jobs was fierce. Now that times are good, I still remember when the opposite was true. For anyone who thinks the demand for CPAs and the traditional work they do will always exceed supply, the inevitable downturn in the business cycle and redundancies created by technology may be tougher to accept.

Nicholas W. Stanger, CPA Roanoke, Indiana

On Fraud and CPAs

I enjoyed reading "To Catch a Thief" (JofA, Mar. 00, page 43) because the information is presented in a way that's particularly accessible to CPAs. Also, the article underscores the gap between the limited work that CPAs can do to find fraud and what people believe they can do.

Most people outside the public accounting profession would assume the interrogation skills described in the article are near-instinctive abilities held by every CPA and that he or she is an expert in finding and investigating fraud. In reality, as a profession, we CPAs do not have the skills or the focus needed to recognize the human indicators of fraud or to properly investigate them.

The summary of fraud interview questions designed to uncover possible areas of concern is the type of information missing from most accounting literature, including that which deals with the CPA's responsibility for detecting fraud.

Thanks for a good "written seminar"

Mark R.. Kolman, CPA, CIA, CFE St. Petersburg, Florida 

An Employee's Viewpoint

"Staying Off the Cover of Time" (JofA, Feb.00, page 31) discussed the recent turmoil surrounding pension plan conversions, with particular emphasis on IBM's recent difficulties.

As a multi-degreed IBMer for more than eighteen years, I'd like to offer an employee's perspective on what happened and what enraged employees to the point of public action.

First, IBM's pension conversion was particularly heinous. Employees comparing the present-day values of the prior and new plans were shocked to see hundred-thousand-dollar losses as the norm. In my case, the opening account balance was less than half the correct amount, and, more amazingly, it was even less than the pension my wife earned in her eight years as a minister. We, like many other IBM families, were suddenly thrown into a state of shock.

Second, IBM simultaneously introduced a devastating reduction in retirement health-care benefits. Not only is the new plan much more restrictive in terms of qualification, but it also discontinues the practice of providing retirees with ongoing yearly coverage. IBM retirees and their families can look forward to approximately three to five years of coverage--a coverage, by the way, which can be purchased only from IBM. For employees with serious medical concerns, this change dealt a significant blow--one perhaps more crucial than the pension plan changes.

Employees viewed these changes in terms of IBM's historic commitments. For decades, IBM presented the retirement benefits as part of each individual employee's total compensation. By reducing those already earned benefits, IBM effectively implemented a retroactive pay cut. Equally noteworthy, IBM has, and purports to continue to have, an unqualified commitment not to discriminate on the basis of age. This written promise is contradicted by the terms and conditions associated with these plan reductions.

Further, the transition itself was conducted in a highly questionable manner. In a dramatic departure from previous benefit plan changes, employees were directed not to contact their managers for further information, but to call a toll-free number and speak to human resource vendors who appeared to be working from prepared scripts. Vital information--official plan documents, statements of vested legal minimums--was not provided. Time and again, employees complained that false and misleading statements were made not just to IBMers, but to the public and even to Congress.

Customers, stockholders and employees alike look to senior executive management to set an example for credibility and trustworthiness. A major disservice has been done in this regard. It is not surprising IBMers have acted with such speed and fury, nor is it surprising to see this effort continue. To date, their actions have resulted in a congressional hearing, the introduction of several bills and scrutiny by several federal agencies, including the Equal Employment Opportunity Commission, the Department of Labor and the IRS.

Whether the nature and severity of these actions merit a story in Time is a decision only the owners and editors can make.

Alan Crudden Austin, Texas

About Billing Standards and Fees

Our profession needs to establish "ethical billing standards" that in essence would force accounting professionals to charge a statutory fee for providing assurance services. Barring professionals from underbidding jobs would reward those who conform to the standards of the profession.

The current competitive bidding process does not take into account that every job has a minimum cost to be completed in conformity with the profession's standards.

Our costs increase every time a new accounting standard or statement of position is released, while the public's perception of the value of our product does not change.

The accounting profession has gone to great lengths to establish standards that protect the public from fraud and misinformation. Now it's time to establish rules that allow us to meet these standards by creating an environment in which this is an economic reality.

Ethical billing would permit us to charge fees sufficient to retain the best and the brightest. Although CPAs are uniquely qualified to provide assurance services, it is unfortunate that personal income tax preparation is more profitable.

Fees for assurance services should be easily determinable, based on the level of assurance provided and a percentage of the greater of total assets owned or revenue earned at the end of or during the period the assurance service is provided. Those accounting professionals who underbid the statutory fee would violate the profession's code of ethics.

James A. Leone, CPA Santa Clara, California 

Letters to the Editor

The opinions and views expressed are those of the letter writers and do not necessarily reflect those of the AICPA.

The JofA encourages readers to write letters on important professional issues in addition to comments on published articles. Because space is limited, letters submitted for publication should be no longer than 500 words. Please include telephone and fax numbers.