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Member of Russell Bedford International, a global network of independent professional service firms.
When you hear the term forensic accounting, images of perpetrators in handcuffs and espionage may come to mind. In reality, it’s not always a CSI moment. Forensic accounting is not only important when taking steps to prevent crime, it’s also vital among day-to-day operations and decision-making within your business.
The Forensic Accounting Academy defines forensic accounting as “the art and science of investigating people and money”. While forensic activities imply the investigation of a crime, many of these methods and techniques should be a part of normal routine oversight, such as analyzing financial statements, reviewing an irregularity, or even when considering significant bids or contracts.
Forensic accounting allows us to identify any deviation from expected results, whether it’s a product of a crime or a less devious mistake. However, when fraud is the culprit, keep some of the facts from the Association of Certified Fraud Examiners’ 2016 global fraud study in mind:
1. In 83% of cases, asset misappropriation was the most common form of occupational fraud. However, it caused the smallest median loss of $125,000.
2. Organizations of different sizes have different fraud risks. Corruption was more prevalent in larger organizations, while check tampering, skimming, payroll and cash larceny schemes were twice as common in small organizations. This is where we recommend our clients have policies and controls in place to minimize risk.
3. Likely your biggest risk is your check register and the controls you put around those procedures. Among forms of asset misappropriation, billing and check tampering schemes posed the greatest risk based upon their relative frequency and median loss.
4. The most common detection method was tips. Organizations with reporting hotlines were much more likely to detect fraud. Even if your company isn’t large enough to have a hotline, most tips will come from within your business. Build relationships with your employees to ensure that they will feel empowered and supported to contact you with any concerns.
5. When active detection methods identified tips, such as surveillance and monitoring or account reconciliation, median loss was lower than when schemes were detected by passive methods or accidental discovery.
6. Fraud perpetrators tended to display behavioral warning signs when they were engaged in their crimes. The most common flags were living beyond their means, financial difficulties, unusually close association with a vendor or customer, excessive control issues and recent divorce or family problems.
7. External audits of financial statements were the most commonly implemented anti-fraud control; nearly 82% of the organizations in the study underwent independent audits. An audit, however, looks at documentation and not controls. It is most often the lack of controls and procedures that enable fraud to take place.
Each organization is unique in its processes, employees and risk exposures. But understanding the activities and systems within your own business helps protect you from internal threats and mistakes. Forensic accounting also gives you the opportunity to implement routine reviews and processes that help your business run smoother. If you would like to learn more about controls and other forensic accounting practices, please contact Cray Kaiser today.
The saying goes, “Call a spade a spade.” But in the world of mergers and acquisitions, it’s more like calling a spade a shovel. The terms are not interchangeable. Rather, they’re most often used together, or merger is stated when the accurate term is actually acquisition.
Technically, there’s a considerable distinction between mergers and acquisitions. While both are the blending of two entities, the difference between the two revolves around the processes of how the two organizations are combined.
A true merger in which neither company’s processes take over the other’s is fairly uncommon, partially because it is costly to keep both companies’ processes alive.
The blending of two entities is frequently communicated both internally and externally as a merger, even when it’s technically an acquisition, likely because the term merger is more palatable to the seller and seller’s team. The term acquisition often bears negative connotations for the company that was purchased, even with a successful, desirable sale.
When you read about a merger in the news, take a closer look. You may discover that in the purest sense, it’s truly an acquisition. However, the companies and people involved may benefit from the positive associations with the term merger, making it acceptable, and even constructive, to call it a merger. In the end, sometimes calling a spade a shovel is the right thing to do.
Struggling to find and retain tradespeople? Deciding when the timing is right to replace that 30-year-old machine? Noticing that your technology systems are slowing you down rather than making you more efficient? You’re not alone. Our 2017 manufacturing outlook addresses the biggest issues facing manufacturers this year and offers perspective from a firm that’s been working with numerous manufacturing companies for 45 years.
When Linda, CEO of Greenville Insurance, asked Gary, Vice President of Melville Manufacturing, for his experience with their accounting firm, she was surprised that his response was based on more than tax and accounting expertise. Gary shared how his accounting firm has also had a significant impact on Melville’s workplace culture. He went on to describe how they assisted with hiring their new bookkeeper, created a control system to correct exposure to fraud and developed a compensation system that was in line with industry best practices.
Gary’s shared experience exemplifies several ways that accountants help their clients evaluate and improve company culture. Accounting is more likely to conjure images of spreadsheets and tax forms than team meetings and high fives. But your accounting firm knows more about your workplace culture than you might imagine.
Today, many headlines for hiring and retention articles reference “workplace culture”. As competition across all industry sectors is on the rise, companies are realizing that workplace culture plays a significant, although often undetected, role in the success of their business. However, it’s often overlooked as day-to-day operating needs take precedence over building a strong workplace environment.
Yet, strengthening workplace culture is not as overwhelming as it may seem. It starts with the individuals you hire, the internal controls you have in place to allow them to work efficiently and the ways in which you compensate them. Just as Gary shared with Linda, be sure your company benefits from ways your accounting firm can add value to your company culture.
Hiring the best person for the job the first time has a major impact on company culture. When mistakes are made in hiring, company culture is negatively affected. The entire group suffers when a team member doesn’t do their job well or is terminated. For example, if a bookkeeper is hired who interviews well but is not truly skilled at their work, they may make mistakes that could create problems for other team members, taking up time in identifying and correcting errors, all causing frustration in the workplace environment.
Small business owners are charged with being the expert in their industry, running the operations and providing leadership. They are typically not the expert in the accounting arena. As with any industry, having an expert in the field on the hiring team helps to ensure a successful hire.
Your accountant can help you hire the right person first by assisting you with job descriptions, referrals and interviewing. Your accountant…
…knows the skills, talents and expertise needed for the job, and they know the right questions to ask to evaluate those skills and talents.
…can clearly and accurately communicate the job requirements and roles.
…can network on your behalf, refer people to you, and share best hiring practices.
Another way your accounting firm can help is by setting up proper control processes to prevent conflict with team members and upset the culture. These controls typically involve separation of duties and ensuring that more than one person is involved in accounting functions. Without control processes, fraud, theft and frequent errors can occur and affect not only your financial results but your culture. Control processes also divide labor, sharing the workload more evenly and leaving the team feeling like workload is fair.
Fair and reasonable compensation impacts company culture. Companies with teams who feel fairly compensated attract better talent, have higher retention rates and are more efficient. Your accountant can help by providing industry comparisons and evaluating budgets and projections.
Company culture is also affected by auxiliary compensation like incentive plans and benefit packages. Your accountant can share best practices and help you evaluate benefit package costs and value to your team. For example, while a tuition reimbursement benefit might be appreciated by a team of younger employees wanting to continue their education, it could be a wasted expense on a team of older employees who do not intend to further their education.
Take advantage of the objective, outside perspective your accounting firm has of your company. When he or she visits, ask about their observations.
After her conversation with Gary, Linda decided to ask her accounting firm to weigh in on a few workplace culture issues. She was pleased to discover that, like Melville Manufacturing, Greenville Insurance benefited from the recommendations they had on their company culture. Specifically, soon after meeting with the internal accounting team, their accountant pointed out that their bookkeeper had considerable skill and could easily be relied upon to manage some control processes.
Next time you meet with your accounting firm, be sure to consider how they can help you evaluate and improve your company culture. If you’d like to talk to Cray Kaiser about how we can assist you, please contact us today.
All business owners speculate about the value of their companies. But like most compelling questions, the easy answers are typically not the worthwhile ones. The many business valuation myths can misguide business owners.
Imagine John, Joanna and Sam discussing the values of their businesses at a networking event for owners of closely-held companies. John says, “we are fortunate to have had a record year after a few down years. That record year will truly drive up the value of my business.” Joanna explains that she, too, believes that her business is worth quite a bit because they have a well-respected Fortune 100 client as their biggest client, one that makes up 85% of their revenues. Sam joins the conversation stating that he already knows what his business is worth: “Barron’s reported that a publicly traded company in my industry sold at 15 times EBITA. All I have to do to figure out the value of my business is calculate 15 times EBITA.”
Unfortunately, all three business owners are buying into business valuation myths that could lead them toward unfavorable decisions. Following are the top business valuation myths, including those that John, Joanna and Sam believe, that lead many business owners astray.
While the earnings stream in the income statement is a determinant of value, this result alone will most often require adjustment and normalization to provide a good indication of enterprise value.
Every valuation, every business and every industry is unique. While industry similarity and industry rules of thumb may indicate value trends, they typically are not adequate to determine the value of an enterprise. Other factors, including customer base, continued patronage, capital structure, growth expectations, intellectual property advances, existed and continued management, must be considered in evaluation of the earnings stream and a conclusion of value.
A buyer of a business considers expected future earnings stream when deciding if they should buy the business and the appropriate price. Historical or past earnings provide an indication of future earnings, but one isolated year is usually not enough to base these expectations. Valuators often consider three to five years of historical earnings or five to ten years of forecast earnings to identify future earnings and growth expectations. Often valuators weigh the historical earnings results with a greater weight being assigned to the most current results as they are perceived to be more reliable indicators of future results. Steady earnings growth is more predictable and therefore more comforting to a buyer than one record year.
While the strong relationships generally do add value, such relationships must be transferable to add value to the business in the hands of a buyer or successor. The transferability of these relationships is generally enhanced when there are strong and well-documented policies and procedures, ongoing employees and management, and visible connections in customer services, sales and management personnel extending beyond the outgoing ownership. Sole dependence on the owner can diminish the value of a business because the business may seem less likely to function, succeed and grow in the absence of the existing owner.
High concentrations in either customer relationships or vendor relationships can significantly increase the risks to a company and its earnings expectations. This is particularly true when the strength of the relationship partner allows them to dictate terms, pricing and production requirements as a result of changes in the operating environment, raw material shortages or management changes. Diversification in customer and vendor relationships can provide a significant hedge against company risks and add to the predictability of future earnings.
While valuations are often conducted in preparation for transactions, businesses are also valued for litigation, disputes, tax compliance, estate transfers and financing requirements. It can also provide a valuable tool for a company’s strategic planning efforts in evaluating their business model, investment requirements, succession and development opportunities. Consider getting a valuation prior to the event in order to digest the results, determine what steps may enhance the value and address any impediments to a smooth and orderly transition.
Determining the value of a business involves understanding the purpose of the valuation, the parties involved, the industry and more factors unique to each company and industry. With the help of a business valuation professional, John will learn that he needs to sustain those record earnings and display a predicable stream of earnings to increase the value of his business. Joanna will discover that diversification is more appealing to a buyer than the risk of one big client. And Sam will find out that the differences between his company and the publicly traded company have a significant impact on the valuation.
We hope debunking these business valuation myths was helpful. To find out more about determining the value of your business, contact Cray Kaiser today.
State taxes used to be simple. You have a store in Chicago; you pay Illinois tax. You have a warehouse in Indianapolis; you pay Indiana tax. But what if you have sales people visiting Denver? Or you work with an online reseller with a location in Denver? Do you need to pay Colorado tax? The tax term used when determining in which localities a business must pay tax is called nexus. How nexus works often stumps even the most tax-savvy business owners, especially with the impact of online sales and constantly changing rules. By understanding and correctly determining nexus, you can avoid unnecessary penalties and stop asking yourself, “do I have nexus?”
Simply put, nexus is the factor that dictates a states’ ability to assess tax. Nexus, or sufficient presence, is determined by a number of factors, including a business’ temporary or permanent presence of people or property in a state.
Some aspects of nexus are clear. For example, if a business has a permanent location in a particular state, there is no federal limitation on a states’ ability to subject the business to income tax. Beyond the obvious, however, each state defines nexus in its own way, and differently for different tax types.
For example, states may consider the following when determining nexus:
States’ definitions of nexus are adapting to evolution in technology. Constantly changing technology changes the way we do business. As online sales grow, businesses conduct more and more business out of state. In addition, advances in technology make it easier for states to collect information about sales occurring within their state.
Additionally, given budget constraints, states are becoming more aggressive in seeking out additional tax revenue.
The lack of a consistent definition of nexus state-to-state creates confusion and exposure to tax liability. Small businesses with little to no internal accounting departments may not have the time or the expertise to properly assess nexus. For businesses with interstate activity that only file a home state tax return, the potential tax exposure and tax complexity can be a significant cause for concern.
A federal nexus definition has been spoken of for years, but thus far has not become a reality. In the meantime, it’s important for business owners to understand their risk. Consult with an accountant to determine how nexus is defined in the states in which you do business. Find out if you need to register to do business in other states or file additional state tax forms. Explore voluntary disclosure programs and statutes of limitations. Most importantly, any time you have a question about whether or not you have nexus in a particular state, check in with your accountant.
Don’t be stumped by your nexus questions. Contact Cray Kaiser today.
Managing a nonprofit organization is quite a balancing act, and the IRS doesn’t make it any easier. Nonprofit-specific tax laws can be even more complicated than those regulations for for-profit businesses. Are you up to date on recent changes in nonprofit tax law? Check out our nonprofit news and tips to ease your 2017 tax season.
Uniform Guidance
Don’t make the mistake of thinking that uniform guidance does not apply to your organization because you aren’t using federal money. Often money awarded through states originates with the federal government. Be sure to confirm the initiation point for all funding your organization accepts.
Uniform guidance, enacted at the end of 2015 for the 2016 tax year, regulates how nonprofits account for federal awards in excess of $750,000. Uniform guidance, which was previously covered by the OMB A-133 audit, is designed to ensure that money awarded by federal agencies is being used as intended. Many organizations hire consultants to prepare them for this annual audit. An outside accounting firm must complete your audit within nine months of the end of your organization’s fiscal year.
Net Asset Classifications
For years you’ve been classifying your net assets into three classes: unrestricted, temporary restricted and restricted. The temporary restricted class is being combined into the restricted class, leaving only the restricted and unrestricted classes. This change will impact how nonprofit organizations’ financial statements are presented and is intended to reduce errors.
Extension Changes
In the past, the extension process had two parts. The first extension due May 15th (calendar year filers) extended the deadline for three months until August 15th. Then, if additional time was needed, a second extension could be filed on August 15th, extending the deadline another three months until November 15th.
For tax years beginning in 2016, the original May 15th extension will now extend the 990 return for six months, thereby eliminating the need for the August 15th extension. The extended return will be due on November 15th, 11 ½ months after the close of the year.
TOP THREE TIPS
If you have any questions about changes in nonprofit tax law or how to implement our nonprofit tips, call us today. Our nonprofit experts are ready to help you with your balancing act.
Diane and Tom, owners of a small manufacturing business, are proud of their daughters and the careers they’ve chosen. Megan, their oldest, has taken over the operations of their business. Their younger daughter, Shannon, is a pediatrician. Diane and Tom built their business and raised their children with similar integrity, resulting in a well-respected business and two strong and successful daughters. Fairness has always been very important to Diane and Tom. As they approach succession planning, they want to be sure their daughters are treated equally. Therefore, they intend to split their business equally between the two daughters. But is equal truly the fairest option when it comes to succession planning for a family business?
Like many family business owners addressing their succession plan, Diane and Tom zero in on the family business and neglect to include their entire estate in their planning efforts. Proper succession planning considers assets beyond the family business. Founders should evaluate their whole estate and identify assets outside of the business that can also be bequeathed in an effort to achieve fairness.
When determining the future ownership of the business, family dynamics will certainly play a role. Sometimes leaving a portion of the business to a child not involved in the day-to-day can result in a significant amount of turmoil. Those in the business may feel slighted, as though their contributions to the company went unnoticed. Those not in the business may not have interest in becoming a co-owner. The solution most often recommended is to leave the business to children who work in the company and allocate other assets to children not in the business.
However, some families may choose to leave equal shares of the business no matter the participation. When this occurs, maintaining leadership through an outside, experienced professional can mitigate issues around family dynamics.
Remember, successful succession planning goes beyond determining ownership. It also involves developing new leaders. While the founders’ children may be the owners of the company, it is important to consider if they have the talents, skills and experience levels needed to lead the company in that moment or in the future. Hiring external C-suite leadership teams to help navigate the family asset can benefit all those involved.
Regardless of how succession is determined, communication is the most vital component prior to the transfer of ownership. Open and honest communication eases the business transition and also helps to maintain strong family dynamics during an emotional time. The goal is that no one feels left out and no one feels misunderstood. Communication brings the family together and puts everyone at the same table with the same information. Good communication ensures:
For Diane and Tom, addressing succession planning now follows the path of integrity that they’ve traveled as they’ve raised their daughters and built their business. By looking at the whole picture and addressing leadership continuity, the succession plan becomes less about assets and more about harmony.
Communicating and sharing the plan maintains that harmony after they’re gone. For more information about succession planning for a family business that has children both in and not in the business, contact us today.
We all use terms in our area of expertise that make other professionals scratch their heads. Just listen to an engineer talk about torsion and seismic loads or a marketer discuss customer relationship management and you’ll feel like you are listening to another language. When you start discussing business valuations with an accounting professional, two terms you will often hear are fair market value and fair value. They sound like they could be interchangeable, but they are, in fact, very different. The standard of value chosen is fundamental to the valuation itself.
Fair market value and fair value are both standards of value. Standards of value are the foundation on which business valuation professionals base the determination of the value of your business and determine the methods that can be used for the valuation. The choice is made based on the intended use of the valuation results and is sometimes pre-determined and part of contract requirements, like in a shareholder agreement.
The most commonly known and accepted standard of value is fair market value. It is defined by the Internal Revenue Service (IRS) in its Revenue Ruling 59-60 as, “The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge or relevant facts.”
Fair market value is the number that reflects what the business would be valued in a sale between a buyer and seller who both have full knowledge of the facts and are under no duress. Basically, it’s the number that you’d expect to see if you put your business out into the marketplace.
The key word in fair market value is “market”. Consider common stock traded on the New York Stock Exchange (NYSE). Investors buy and sell stock of large companies on the NYSE all the time without having any controlling interest. Apply that to a smaller business without shares being actively traded on an exchange. A valuation that uses fair market value as a foundation searches for the market equivalent for a closely held business share.
Fair market value is typically used when valuing businesses for the following situations:
Part of what differentiates fair market value from fair value is the market and control discounts. Fair market value typically includes the following discounts and premiums:
The Financial Accounting Standards Board defines fair value as, “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
The distinction between fair market value and fair value is in some ways as simple as noting that the only difference between the two terms is that one contains the word “market” and the other does not. When fair value is the foundation for your business valuation, consideration of the market discounts does not come into play. Fair value is often considered a hazy concept. Its use is typically determined by state statute and common usage.
Fair value is often used when valuing businesses for the following situations:
To better understand the difference between these two standards of values, let’s envision a pie divided into four slices. The value of each slice of pie differs depending on which standard of value is used as a basis for the valuation.
Understanding the difference between fair market value and fair value helps you learn the language of business valuation and improves communication between you and your business valuation professional. Plus, it tends to be easier than talking to an engineer! To learn more about how a business valuation can help your business reach the next level, contact Cray Kaiser today at 630-953-4900.
Click here to read about the top business valuation myths.
