Author: Alexa Key

What’s the most costly type of white collar crime? On average, a company is likely to lose more money from a scheme in which the financial statements are falsified or manipulated than from any other type of occupational fraud incident. The costs frequently include more than just the loss of assets — victimized companies also may suffer lost shareholder value, lower employee morale, premature tax liabilities and reputational damage. Let’s take a closer look at what’s at stake when employees “cook the books.”

Low frequency, high cost

The Report to the Nations on Occupational Fraud and Abuse published in 2016 by the Association of Certified Fraud Examiners (ACFE) found that less than 10% of the fraud schemes in its survey involved financial statement fraud. However, those cases clocked the greatest financial effect, with a median loss of $975,000. Compare that amount to the median losses for asset misappropriation ($125,000) and corruption ($200,000).

What makes financial statement fraud especially problematic is that the costs can quickly snowball out of control. For example, when an executive fudges the numbers to make a company appear more profitable, the company will likely incur greater liability for taxes or dividends.

Plus, it might be necessary to take on debt to make those payments, leading to higher interest costs. Or an acquisition of a healthy company might be pursued to hide the actual underperformance. In the end, more fraud may be necessary to pay for the original scam.

Common schemes

The ACFE defines financial statement fraud as “a scheme in which an employee intentionally causes a misstatement or omission of material information in the organization’s financial reports.” Common ploys include:

* Concealed liabilities,
* Fictitious revenues,
* Inflated asset valuations,
* Misleading disclosures, and
* Timing differences.

Revenue recognition is a particularly ripe area for financial statement fraud, especially as companies start to implement the new revenue recognition guidance for long-term contracts. Early revenue recognition can be accomplished through several avenues, including 1) keeping books open past the end of the accounting period, 2) delivering products early, 3) recording revenue before full performance of a contract, and 4) backdating sales agreements.

Preventive medicine

Victims of financial statement fraud often find their long-term survival severely threatened in a relatively short period of time. Hiring an outside forensic accounting specialist to evaluate internal controls can help identify red flags, ferret out ongoing schemes and deter would-be fraudsters. Contact us for more information.

© 2017

If your not-for-profit is “stuck” and you’re not sure how to move forward, consider adopting some for-profit business practices. The essential missions of businesses and nonprofits are different, but the ways to achieve them often are the same.

Make a plan

The strategic plan — a map of near- and long-term goals and how to reach them — lies at the core of most for-profit companies. If your nonprofit doesn’t have a strategic plan or has been lax about revising an existing one, make this a top priority.

Set objectives for several time periods, such as one year, five years and 10 years out, paying particular attention to each strategic goal’s return on investment. For example, consider the resources required to implement a new contact database relative to the time and money you’ll save in the future. Working through the financial implications of ideas can help you avoid the kind of initiatives that sound good in theory but are unlikely to provide returns.

Spend differently

Next, your annual budget should follow your strategic plan. For-profit businesses use budgets to support strategic priorities, putting greater resources behind higher priority projects.
Businesses also routinely carry debt, believing that it takes money to make money. Nonprofits typically do everything in their power to avoid operating deficits. Unfortunately, it’s possible to operate so lean that you no longer meet your mission. Building up your endowment, applying for a loan or even creating a for-profit subsidiary could provide you with the funds to grow.

Pay for experience

Most for-profit companies budget for experienced leadership. Although nonprofits typically can’t pay their executives as much as businesses do, you can ensure that compensation is competitive relative to other organizations.

Paying for experience is particularly critical when you’re embarking on major fundraising campaigns or looking to expand your program outreach. You may even want to consider candidates from the for-profit world, who might bring greater marketing and financial management expertise and new ideas to the table.

Take baby steps

Translating for-profit business practices to your nonprofit won’t necessarily be easy, so start with baby steps. If you need help, please contact us.

© 2017

Like many companies, yours probably stores at least some of its business files, documents and information in “the cloud.” This is the widely used term referring to the seemingly infinite data storage capacity of the Internet.

Using the cloud generally means lower IT costs, because you don’t have to deploy a lot of expensive hardware and software on-site and it’s scalable — in other words, you can easily expand or diminish your data storage capabilities as necessary. Most cloud services also feature automatic backups and updates.

But these inherently great features don’t guarantee you’ll get a good return on investment. To make the most of the cloud, you’ll need to identify and follow some best practices. Here are two to consider.

A carefully vetted provider

Moving from on-premises, server-based data storage to cloud-based data storage requires a different mindset. You’ll be unable to physically look at and touch a server box and say, “That’s where my data is stored.”

This makes it critical to choose a cloud services provider you can trust and build a strong relationship with as a true business partner. Ask potential providers for the names of two or three of their clients you can speak with about issues such as level of security, responsiveness and technological sophistication.

Well-defined objectives

You need to pinpoint your recovery time objectives and recovery point objectives (that is, the most critical data points for your business) concerning the backup and recovery of your data in an emergency. Be sure you’ve clearly communicated these to your cloud services provider.
Your provider should be able to work with you on an individualized basis to ensure that your objectives will be met. You don’t want to find out during a crisis that you’ve lost mission-critical data.

Worth considering

If you haven’t ventured into the cloud yet, give it some consideration — these services are becoming increasingly common. And if you have, be sure you’re getting your money’s worth.

© 2016

Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return.

Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.

When filing is required

Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:

•    That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),

•    That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse,

•    That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions,

•    To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016,

•    Of future interests — such as remainder interests in a trust — regardless of the amount, or

•    Of jointly held or community property.

When filing isn’t required

No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Meeting the deadline

The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.

Have questions about gift tax and the filing requirements? Contact us to learn more.

© 2017

The break allowing taxpayers to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes was made “permanent” a little over a year ago. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat.

Your 2016 tax return

How do you determine whether you can save more by deducting sales tax on your 2016 return? Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax.

Don’t worry — you don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases (for which you will need substantiation).

2017 and beyond

If you’re considering making a large purchase in 2017, you shouldn’t necessarily count on the sales tax deduction being available on your 2017 return. When the PATH Act made the break “permanent” in late 2015, that just meant that there’s no scheduled expiration date for it. Congress could pass legislation to eliminate the break (or reduce its benefit) at any time.

Recent Republican proposals have included elimination of many itemized deductions, and the new President has proposed putting a cap on itemized deductions. Which proposals will make it into tax legislation in 2017 and when various provisions will be signed into law and go into effect is still uncertain.

Questions about the sales tax deduction or other breaks that might help you save taxes on your 2016 tax return? Or about the impact of possible tax law changes on your 2017 tax planning? Contact us — we can help you maximize your 2016 savings and effectively plan for 2017.

© 2017