January, 2014 | RKL LLP
Posted on: January 29th, 2014

How to Stop Fraud in Your Business

accounting fraud lancaster paWith year-end close upon us, many business owners are anxious to see final profit numbers. While it’s likely you have a good idea of what to expect from the previous year’s performance, sometimes there are unwelcomed surprises and questions that can arise as a result of preparing financial statements, reviewing results and looking more closely at cash flow.

How can income be down when sales were up so much last year? Why doesn’t our cash flow seem to match the increase in our operating results? Why are our expenses up so much over budget?

The good news is that fraud can be detected by digging deeper to answer these questions. The bad news is that frauds often go on for more than five years before they are finally uncovered.  Why? In my experience as a Certified Fraud Examiner (CFE), I’ve seen it in nearly every case I’ve been involved in. It starts out so small that it can easily go unnoticed. A shortage of cash or extra expenses might just be “timing” or “bookkeeping errors” that will work their way out when the books are adjusted at year end close.

As they grow more confident, a hardworking fraudster can easily divert $50k to $100k per year before the scheme is uncovered.  If gone undetected for several years, damages can be significant.

But this does not need to be the case.  In fact, implementation of these three simple tips would put most of the fraudsters I see out of business years earlier.

  1. Review Your Monthly Bank Statements. Bank statements should be opened or accessed online by the owner or a key employee without a bank access.  You should review the monthly activity, paying extra attention to cancelled checks and electronic transactions.  Ask a few questions each month and initial the printouts or paper statements so your employees know you are reviewing them.
  2. Implement a Fraud Hotline and Code of Conduct. A hotline does not need to be complex.  Simply posting a notice in the lunchroom telling employees how to report suspected fraud can be very effective.  This sends a message that the company is ethical and does not tolerate fraud of any kind.  Requiring employees to sign a Code of Conduct stating that he or she is responsible to report suspicious activity also helps to support the “tone from the top.”
  3. Cross-Train Employees. Cross-train several employees to do tasks that pose a high risk of fraud to the company (i.e. bank reconciliations, payroll, and check disbursements).  Require employees with access to company funds or other assets to take regular vacations and have the cross-trained employee perform their duties while they are away.

Although these three controls may seem very simple, they are extremely effective.  By actively devoting a small amount of time to each, you’ll be better positioned to guard your company against most of the frauds we see on a daily basis.

Want to know more about how RKL can help you prevent or investigate potential fraud in your business? Contact Bethany A. Novis, CPA/ABV, CVA, CFE, at (717) 394-5666 or bnovis@rklcpa.com.

fraud forensic accounting lancaster paContributed by Bethany A. Novis, partner in RKL’s Business Consulting Group and managing partner of RKL’s Lancaster office. Bethany specializes in fraud investigation, business valuation and litigation services. In addition to being a licensed CPA accredited in business valuation, she holds designations as a Certified Valuation Analyst (CVA) and a Certified Fraud Examiner (CFE).

Posted on: January 28th, 2014

New Accounting Methods for Private Companies

identificationWith recent discussion around accounting alternatives for privately-held companies, many CFOs and their counterparts are considering the cost-benefit of implementing new and emerging reporting standards in their organizations.

It’s widely known that pronouncements under U.S. GAAP are geared toward larger companies and that costs associated with implementing and complying with these can greatly outweigh the benefits to privately held companies. While any change in your financial reporting warrants an in-depth discussion with your accountant, let’s take a look at the two plans currently being discussed in the accounting industry.

AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs)

In June 2013, the AICPA released the FRF for SMEs as an alternative to U.S. Generally Accepted Accounting Principles (GAAP) for privately-held companies. Similar in many respects to U.S. GAAP, the framework has distinct differences including the treatment of comprehensive income, consolidations/subsidiaries, derivatives and several others.

While it included some appealing aspects, it’s believed that the related effort required to issue statements in accordance with FRF for SMEs would closely equate to the effort required to general U.S. GAAP compliant financial statements.  With implementation and conversions that would need to be addressed upon adoption, discussions with banks, rewrites and associated feeds with changing debt covenants and verbiage in debt agreements, moving to the FRF for SME framework requires serious consideration.

Financial Accounting Foundation’s Private Company Council (PCC)

In December, RKL clients and team members heard firsthand about an alterative to FRF for SMEs directly from the Financial Accounting Foundation’s appointed chair of the newly formed PCC, Billy Atkinson. The PCC has been tasked with analyzing situations where modifications or exceptions would be granted to privately held companies regarding reporting requirements for certain GAAP related matters. The PCC exceptions would still be considered US GAAP, versus the FRF for SMEs, which is a comprehensive basis of accounting other than U.S. GAAP.

In January, the PCC released updates to U.S. GAAP for privately-held companies on the subsequent accounting for goodwill and for interest rate swaps. The PCC continues to work through several projects and, in time, will likely address the majority of issues brought forth in the FRF for SMEs. In doing so, many believe the inherent value of the FRF for SMEs may be diminished.

Learn more about the FRF for SMEs and PCC. Have questions about your company’s financial reporting? Contact your RKL advisor and stay tuned for more details on the PCC’s Accounting Standards Updates.

PCC Accounting Financial ReportingContributed by Hunter Mink, CPA, (hmink@rklcpa.com) a manager in RKL’s Auditing and Accounting Services Group. Hunter helps companies in a variety of industries, including architectural/engineering firms, construction and manufacturing companies and other commercial and not-for-profit entities  with their audit and financial reporting needs.

Posted on: January 22nd, 2014

PA New ID Verification for Tax Refunds

PA Tax Refund Identity VerificationIn response to growing identify theft concerns, taxpayers may need to complete an additional step before receiving their state tax return in 2014: identity verification. In an effort to combat tax fraud and identity theft, the Pennsylvania Department of Revenue has instituted new security measures to identify fraudulent refund filings beginning with the 2014 income tax filing season.

What Happens if You Are Selected for ID Verification

Taxpayers may be asked to confirm their identities before refunds are issued. If you are selected for the identity verification, you’ll receive a letter from the PA Department of Revenue sometime after you file your personal income tax return.  The letter will be sent to the address on your personal income tax return and will instruct you to call a designated number.  You’ll then be asked to provide answers to questions to verify your identity.

The Pennsylvania Department of Revenue hopes that the initiative will help detect and prevent the issuance of fraudulent tax refunds resulting from identity theft.

Have questions about the PA Department of Revenue’s new identity verification measures? Contact your RKL tax advisor.

 

Posted on: January 13th, 2014

The Four Critical Issues Your Buy-Sell Agreement Must Address (Part 2 of 3)

buy sell agreementsIn our last post on buy-sell agreements, we discussed how a well-crafted buy-sell agreement provides peace of mind to business owners and their key employees.  Hopefully, we have convinced you that undertaking the task of developing an agreement or updating your existing one is well worth it.  But, what exactly should be included in a buy-sell agreement?  Based on our experiences with business owners, we think that the following four components are essential.

  1. Restrictions on Ownership Transfers.  Your buy-sell agreement controls who can own stock, when stock can be transferred and how stock is transferred.  It should include restrictions on a shareholder’s ability to transfer his or her shares.  Other owners are often given the right of a first refusal to match the offer presented by a third party or an option to purchase the ownership interest being transferred.
  2. Events Triggering a Buyout.  The specific conditions or events that will cause the buy-sell agreement to be “triggered” should be defined in your agreement.  Events that should be considered include the following:
    • Voluntary transfer by an owner;
    • Involuntary transfer by an owner (caused by divorce, bankruptcy, or creditor action, etc.);
    • Death of an owner;
    • Disability of an owner;
    • Termination of employment of an owner (voluntary and involuntary); and
    • Irreconcilable deadlock among owners.
  3. Valuation of Shares.  This is often the weakest link in buy-sell agreements.  We recommend that buy-sell agreements establish exactly how the business will be valued upon a triggering event.  Be wary of formulas or fixed-prices because these valuation methods often do not reflect fair market value.  Ideally, the business’ value should be initially determined by a credentialed valuation expert and updated at predetermined intervals and/or upon a triggering event.  This ensures that all parties understand the valuation approach and conclusion and helps to avoid surprises.  The standard of value, level of value, “as of” date, qualifications of appraiser and appraisal standards should also be addressed.
  4. Funding the Buy-out.  The agreement should establish the funding source(s) that will be available for the purchase of the shares in accordance with the conditions of the agreement.  Life insurance, cash, promissory notes and external financing are common mechanisms to fund shareholder buy-outs.  Understanding the advantages and disadvantages of each option is an important step in the process of creating an effective buy-sell agreement.

While the above elements are certainly not the only issues addressed in a buy-sell agreement, they are critical.  Buy-sell agreements must be drafted in a manner that make them legally binding on the parties to the agreement.  Business owners need to rely on their legal counsel regarding such matters.

Have questions about establishing or updating your buy-sell agreement. Contact Paula K. Barrett, CPA/ABV, CVA, partner and leader of RKL’s Business Consulting Services Group, at pbarrett@rklcpa.com or 610.376.1595.

paulaContributed by Paula K. Barrett, CPA/ABV, CVA, partner and leader of RKL’s Business Consulting Services Group. Paula specializes in business valuation and litigation support services, assisting clients in the acquisition or sale of closely-held businesses and general business planning services. She also has experience in tax-exempt bond financing services, including bond verifications and arbitrage rebate computations.

Posted on: January 6th, 2014

RKL Names Stephanie Kessler Partner

RKL is pleased to announce that Stephanie S. Kessler has been named a partner. As a newly appointed partner with the firm, Stephanie has joined RKL’s top leadership team in providing direction on our continued growth and success.

Lancaster PA accounting firms

Kessler was recently named a partner in the firm.

Stephanie joined RKL in 2011 as part of the firm’s Senior Living Services Group which provides operational, financial, clinical, reimbursement and compliance consulting services to the healthcare industry. Prior to joining RKL, Stephanie worked in healthcare consulting practices for regional and international public accounting firms.  Her background also includes working in various clinical, administrative and educational functions in the healthcare industry.

Stephanie is active in her industry and the community, serving as a board member with the American Association of Nurses Assessment Coordinators (ANNAC), a member of the “Embracing Aging” Committee of the York County Community Foundation and a board member of Lutheran Social Services – South Central PA Foundation. She resides in Dallastown.

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