The CTA is intended to fortify the financial system’s integrity by enforcing transparency. More than just regulatory compliance, the CTA is a crucial step toward dismantling opaque financial structures that facilitate crimes like money laundering and fraud. For small businesses, particularly those with limited resources or complex ownership structures, this means navigating a new, potentially costly layer of compliance. For CPA firms, it’s about adapting to these complexities not just to ensure compliance, but to support broader economic and societal goals of increased accountability and security. The act, therefore, not only aims to protect the financial system, but also to enhance the attractiveness of the United States as a business hub, operating under regulatory oversight designed to deter financial crimes.
From Compliance to Ethics
In financial compliance, the role of business ethics becomes increasingly profound for CPA firms. Ethical conduct involves more than adhering to laws; it requires a deep commitment to honesty, integrity, and transparency across all services. This ethical foundation is crucial for building client trust and protecting both clients and the firm from legal and financial repercussions. As CPAs have begun navigating the complexities of the CTA, they have faced the dual challenge of maintaining ethical standards while managing a new administrative burden. The ethical considerations become particularly significant when firms must decide whether to expand their services to include navigating these complex legal terrains, potentially requiring expertise beyond traditional accounting.
Faced with the decision of whether to assist clients, CPA firms confront a daunting task. According to the Financial Crimes Enforcement Network (FinCEN), the average burden of reporting beneficial ownership information varies significantly: 90 minutes per response for straightforward cases, and up to 650 minutes for complex ones (https://tinyurl.com/yc7sddua). An example of such complexity is an LLC owned by different trusts, necessitating a detailed understanding of who qualifies as a substantial control person and a beneficial owner.
Helping clients navigate this new legal landscape represents an opportunity to potentially expand services and strengthen client relationships. But entering any new practice niche requires that CPAs navigate complex legal territories that might demand expertise beyond traditional accounting skills and a significant allocation of resources.
On the other hand, the firm must consider its capacity, expertise, and operational efficiency. Undertaking complex, time-consuming filings could strain resources, detract from other services, and expose a firm to new risks, especially if filings are executed incorrectly due to misunderstood legal nuances.
A CPA firm’s dilemma centers on balancing these conflicting demands: the desire to meet client needs and seize new business opportunities versus the need to maintain operational integrity and manage risk appropriately. The following recent articles have dealt with the CTA: Shenkman, “Complying with the Corporate Transparency Act,” The CPA Journal, Nov./Dec. 2023 and Reese and Ference, “The Corporate Transparency Act and CPA Firms,” Journal of Accountancy, Jan. 1, 2024.
Evaporating Cloud—A Conflict Resolution Tool
The Evaporating Cloud is a problem-solving tool developed by Dr. Eliyahu M. Goldratt (It’s Not Luck, North River Press, 1994) designed to identify and resolve conflicts. In general, there are three main steps in developing and resolving the cloud.
Step 1: Identify the conflict.
The first step is to clearly articulate the specific conflict or problem that needs to be resolved. This involves identifying the two opposing actions or desires that are causing the conflict (D and D’). Next, construct the Evaporating Cloud diagram (Exhibit 1), which typically consists of five boxes: the common goal or objective that both conflicting sides aim to achieve (A), the necessary conditions or needs each side believes are essential to achieving the common goal (B and C), and the specific wants/decisions/actions each side proposes which are in direct conflict with each other (D and D’).
EXHIBIT 1
A CPA Firm’s CTA Compliance Cloud
How does one read a cloud? The top side of the cloud is read from left to right in the format: “In order to ‘have common goal (A)’, we must ‘meet need (B)’ and in order to ‘have (B),’ we ‘feel pressure to enact want (D).’” The bottom of the cloud is also read the same way from left to right. The conflict arrow between D and D’ on the right is read: “On one hand, we feel pressure to ‘take action or make decision (D)’ and on the other hand, we also feel pressure to ‘take action or make decision (D’).’ Hence, we are captured in a conflict.”
When applied to the CTA compliance conflict faced by a CPA firm, one can read the graphic representation as follows: “In order to ‘grow the client base’ (A), we must ‘seize new business opportunities’ (B), and in order to ‘grow the client base’ (A), we must ‘manage operational integrity (efficient, ethical and risk-free)’ (C).” To continue reading from right to left we link box D with box B and box D’ with box C as follows: “In order to ‘seize new business opportunities’ (B), we must ‘accept CTA Compliance Clients’ (B), and in order to ‘manage operational integrity (efficient, ethical and risk-free)’ (C), we must ‘not accept CTA Compliance Clients’ (D’). On one hand, we feel pressure to ‘accept the CTA compliance clients’ and on the other hand, we also feel pressure ‘not to accept CTA compliance clients.’ Hence, we are captured in a conflict.”
Step 2: Analyze the assumptions.
This step entails listing and identifying the assumptions underlying the connections between entities B-D, C-D’ and D-D’. One technique commonly used to surface assumptions is to complete the sentence: “In order to have (Goal A), we must satisfy (Need B) because ____.” The phrase following “because” is an assumption underlying the relationship in the Evaporating Cloud. These assumptions are the beliefs or premises that lead each side to think that their proposed action is necessary to achieve their need. Critically examining each assumption means questioning their validity and necessity. Look for logical inconsistencies or alternative perspectives that may reveal hidden solutions. This analysis is crucial for uncovering the root causes of the conflict.
When applied to the CTA compliance conflict faced by a CPA Firm, Exhibit 2 lists a variety of possible assumptions for each of these connections. For example, review Assumption 1 for D-D’. On one hand, we must ‘accept the CTA compliance clients’ and on the other hand, we must ‘not accept the CTA compliance clients (i.e., continue providing current services)’ because (Assumption 1) ‘the firm’s resources and personnel are limited.’
EXHIBIT 2
A Possible Set of Assumptions and Corresponding Injections
Step 3: Develop a resolution.
In some cases, a careful examination will identify assumptions that are either not valid or for which a possible solution (injection) can be developed. An injection is an action or solution implemented to address or mitigate a specific assumption underlying a conflict in a decision-making process. Thus, injections are designed to resolve the conflict by challenging the validity of the assumptions. These are actions or changes that directly address and challenge these assumptions. By doing so, injections help to break the conflict and create a path forward that can satisfy both sides of the conflict. Not all readers will agree with the example injection presented. It is one example that demonstrates the framework and process which permits more informed decision-making when faced with any dilemma.
A possible injection for the D-D’ arrow is as follows:
Assumption 1: The firm’s resources and personnel are limited.
Injection: Allocate resources more efficiently by using project management tools and outsourcing non-core tasks to external providers and use the FinCEN’s Small Entity Compliance Guide to quickly understand the complexity of the client’s situation. (This helps in allocating resources effectively by determining the level of expertise and support required for each client.)
A super injection is a general, overall solution that solves several assumptions on several conflict arrows at the same time. It is an amalgamation of several small injections into one single strategy that resolves the conflict effectively on a larger scale. Super injections are more strategic and, overall, offer a long-term solution to the conflict. For example, a super injection for a CPA firm could be creating a phased process of incrementally building CTA compliance services, with a pilot starting first. The idea is that it enables the firm to scale resources, meet people constraints, build training incrementally, and juggle client pressures.
Although recent Treasury Department announcements have halted enforcement of the CTA against domestic reporting companies, the requirement that foreign companies must report their beneficial ownership remains. CPA firms will have to remain current on further developments. CPA firms will continue to find FinCEN’s Small Entity Compliance Guide (https://tinyurl.com/bdf7yyyh) helpful in evaluating client complexity and establishing capacity. Compounding systematic strategies like the Evaporating Cloud framework presented here makes it possible for CPA firms to address effectively moral issues, the complexity of clients, and compliance even in a case of regulatory uncertainty.
Practical Insights
The authors’ analysis of the conflict faced by CPA firms in deciding whether to accept or not accept CTA compliance work, using Goldratt’s Evaporating Cloud tool, has yielded several practical insights. By applying this framework, firms can clearly define the conflict between expanding services and maintaining operational integrity, understand the underlying needs, and surface the assumptions associated with these opposing choices. This structured approach facilitates informed decision-making. Identifying and critically examining assumptions helps uncover hidden issues driving conflicts, leading to more effective resolution strategies. Developing targeted actions, or injections, addresses these assumptions and provides sustainable solutions. Additionally, a phased integration plan, starting with a pilot program and using available tools ensures a strategic and holistic approach. Forming strategic partnerships with legal and compliance experts, developing clear prioritization frameworks and service level agreements, and investing in specialized training and continuous learning programs further enhance a firm’s capability to manage compliance challenges. These insights collectively help CPA firms balance client demands, manage risks, and improve service quality. For a breakdown of these actionable insights, refer to Exhibit 3.
EXHIBIT 3
Practical and Actionable Insights
More Nuanced Problem Solving
We are all familiar with one traditional means of solving dilemmas—making a list of the pros and the cons. The Evaporating Cloud is more sophisticated and nuanced than the traditional means. It features the detailed elements necessary in evaluating the pros and the cons, and then it takes the decision-making process to a higher level by relating those elements to each other in terms of level of importance (needs versus wants) while constantly keeping the goal foremost in mind. Then, the Evaporating Cloud tool provides significant information to permit the surfacing of assumptions relating to the elements of the cloud. Those assumptions are then evaluated in terms of validity, and the results will hopefully result in an injection that satisfies the goal without compromising the initial conflicting viewpoints. The Evaporating Cloud framework enables CPAs to identify innovative and ethical solutions, addressing dilemmas such as CTA compliance and other complex issues like ESG reporting mandates, lease accounting complexities under ASC 842, and digital asset accounting standards. Readers interested in trying this themselves can create an account at https://evaporatingclouds.com.
