Volume 7 Number 4

From The Corner Office By Mitchell Freedman, CPA/PFS

One of the largest companies in the world came crashing down seemingly overnight. How did it happen? That seems like an easy question to answer, but it isn't. The media, regulators, and politicians at the Federal and state levels have all been having a field day pointing fingers and discussing the matter. Employees of Enron had their retirement plans decimated. Uninvolved partners and employees of Andersen have been indicted for criminal acts. The "man on the street" has opinions about it. But, the questions remain. How? Why? Who? Blame has been heaped upon Andersen, one of the most esteemed firms of auditors in the world. And, certainly it appears as if at least some blame lies with individuals there. But blame lies with others too.

There seems to be a societal change in the attitude of some auditors and others. When I first started as an auditor the attitude ingrained in me was that my primary obligation was to the public or other users of the financial statements. Auditors are entrusted with the obligation to opine as to whether or not financial statements are "presented fairly in accordance with generally accepted accounting principles." It doesn't matter that the client pays for the audit or that it contracts for other services such as tax planning or consulting. The tenet of being skeptical is key.

Today however, our largest firms of auditors are big business. There is intense pressure to enhance the "bottom line." Firm success and career improvement lies with the control of billings. Some auditors, and I believe they are a small minority, have abdicated their duty to be unbiased as a way to develop or preserve client billings.

But Enron's management had primary responsibility for the financial statements. Brokerage firms and security analysts should have done a better job of researching to isolate problems and to ask questions. The SEC was supposed to police public companies. Public utility commissions have oversight of energy companies. Financial advisors are supposed to advise their clients to diversify their portfolios. All of these "protections" seem to have broken down in the Enron debacle.

What's the answer? More regulation? More legislation? Frankly, I think that more individual personal ethics are what's needed. Those who have the duty to provide a service, whether in business, auditing, or in government and regulatory areas must begin to think of others and not just their own interests. Our financial markets and our reporting systems are still the best and most respected in the world, but they are obviously far from perfect. The integrity of financial information is essential in order for the U.S. markets to remain preeminent.

Tips and Alerts Be Careful When Giving to Charaties By Kathleen Huse

When the charities come “knocking on your door,” here are some things to keep in mind.

• Always pay by check made out to the charity, not the person doing the collecting.

• Be aware that not all donations are tax-deductible. Keep a record for tax purposes: a receipt or acknowledgment letter is required for the IRS when the gift is over $250.00.

• Pay close attention to the name. Unscrupulous people use a name very close to a well known charity as a scam.

• Be careful when you receive a solicitation that brings tears to your eyes, but does not detail what the charity is doing.

• You do not have to pay for merchandise you did not request. Nor do you have to return the items if you do not make a donation.

• When you receive something for your donation, only the amount over the fair market value of the goods or services received is considered a charitable deduction.

• If approached on the street, ask for the charity's name and address, permits, licenses, etc.

• Do not allow yourself to be pressured to give on the spot. Reputable charities will be there to accept your donation if you need a day or a week to think about it.

• If you are considering a large donation, you can request a copy of their annual report and financial statements. This will give details about their programs and how their money is spent.

Tax Notes This Just In - Retirement Plan Update! By Karen Cho

In the last issue of The MFAC Report, we informed you that California had not conformed to the Federal retirement plan limits for 2002, and we told you that we would keep you updated. We can now report that on May 8, 2002, Governor Gray Davis signed into law legislation that among other things brings California into conformity with the Federal amounts for retirement plans.

Long Term Care Insurance (an option to help fund care costs) By Mitchell Freedman, CPA/PFS

The fastest growing segment of our population is the elderly. Due to lifestyle changes and improvements in medical care and medications, people are living longer and healthier lives. Well, that's the good news. On the flip side, the costs associated with long term care, once the elderly require it, continue to accelerate at more rapid clip than the general rate of inflation. Individuals who have planned for their retirement years, hope and indeed expect to have been able to accumulate sufficient assets and retirement income to pay for their needs. However, they should consider hedging their bets with long term care insurance, a viable risk management tool. It most certainly can provide a measurable supplement for individuals' needs for funding the costs for long term care services that might arise if they have to move to an assisted living facility or a nursing home.

Once you make the decision that you wish to investigate the feasibility of purchasing long term care insurance you will need to make a series of decisions in order to purchase the amounts of insurance desired along with the policy options you wish to secure.

Policy Premiums - Premiums are determined based upon your age at the time of purchase, so the younger you are when you purchase the policy, the less costly the premiums. However, premiums could rise if the insurer decides to and obtains permission from the state insurance authorities to raise them for all policyholders. The premium costs are likely to be under $1,000 per year for a 50 year old, close to $2,000 per year for a 65 year old, and substantially more than $5,000 per year for an individual approaching 80. The differences in premiums between a basic policy and one with numerous "bells and whistles" could be in the neighborhood of 300%. Careful consideration of the options purchased is essential.

Choosing an Insurance Company - With more than 100 companies offering long term care insurance, it is important to make certain that the company you select is financially secure. Check with the major insurance company ratings services or ask your insurance professional to examine the claims paying ability of the insurance company from which you are considering purchasing your policy.

Choosing a Policy - Look for a policy that will cover the insured if there is cognitive impairment such as Alzheimer's disease or other types of dementia. Also, make sure you are comparing policies' claims triggering events as they relate to the Activities of Daily Living (ADL). In addition, determine if you will be satisfied as to who determines if you qualify for benefits. Will it be your physician or an employee of the insurance company? Additional policy features to consider are: non-forfeiture benefit, guaranteed renewability, protection against lapse for failure to pay due to cognitive disorder.

Selection of the Benefit - You will need to determine the daily benefit and the duration of the benefit that you wish to purchase. As you are determining benefits based upon costs today, give consideration to obtaining an inflation rider that will increase the daily benefit over time. Also select an elimination period (the self insurance period) with which you are comfortable. Look to obtain coverage for the costs of home care, adult day care, respite care, and hospice care. Make sure that you understand how the benefit(s) will be triggered.

Who should purchase a long term care insurance policy? There is no definitive correct answer. But, here are my rules of thumb. If one has sufficient wealth to fund long term care costs for himself and his spouse and leaving an estate to heirs is not an issue, there is no need to purchase the product. On the other hand, if it is possible that the care costs of the first spouse will impoverish the second spouse, considering the purchase of such a policy is appropriate. Lastly, if individuals have so little income, assets, or both that they will qualify for Medicaid (MediCal in California) it might be a waste of financial resources to buy a policy. As with any financial planning decision, one must weigh the costs and benefits to determine whether to purchase long term care insurance.

Heard in the Hall

January is generally a busy travel time for Mitch and 2002 proved to be no exception as he racked up frequent flier miles traveling to The All-Star Financial Group semi-annual meeting in Orlando on January 5th, followed by the AICPA Personal Financial Planning Technical Conference there on the 7th through 9th. Then it was on to Las Vegas for the CalCPA Education Board of Trustees meeting on January 14th. Closer to home, in Los Angeles, were the California Jump$tart Coalition “All-Hands” meeting on January 23rd and the AICPA ElderCare Task Force meeting on January 28th and 29th.

On January 13, 2002 Mitch made a guest appearance on KNBC Channel 4 “Today in L.A.,” on behalf of California Jump$tart Coalition discussing the need for financial literacy among children. Mitch was a speaker and a panelist at the New York State Society of CPA’s Foundation for Accounting Education Disaster Planning Conference in New Yrok City on February 4 and 5, 2002 on the subjects, “Lessons Learned from Natural Disasters,” and “Portfolio Structure Post September 11th.” On February 20, 2002 Mitch gave an “Update on ElderCare” presentation for the San Francisco Chapter of CalCPA in San Francisco. Mitch was featured in the January 2002 issue of Practical Accountant regarding long term care insurance.